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Real Estate Tokenization: What It Means and Its Benefits

A Brief Guide On Real Estate Tokens
Real estate tokenisation is the next big thing in the industry. Think about the craze with cryptocurrencies, blockchain, and NFTs and you’ll get the picture. And like those popular innovations, it’s not all hype.
Real estate tokenisation could close the wide gap between the wealthy and average investor. For instance, the real estate investment market is worth over 12 trillion dollars today. And that’s excluding the value of personal homes. Yet, only accredited investors and the wealthy could tap into this wealth-building venture.
Or could they?
With tokenisation, almost anyone can now invest in real estate with a couple of dollars.
How does creating tokens achieve this and “is it safe,” you wonder? Not to worry. I’ll cover the basics to understand that real estate tokenisation is a trend to watch closely.

What Does Tokenization Mean In Real Estate?

Tokenisation is the production of digital tokens that represent shares in a property or investment. A certain investment, Real Estate Investment Trust (REITs) was the earliest form, which kicked off in 1960.
For the first time, “ordinary” people could invest in mega investments and have a share ascribed to them. And then receive dividends — payouts — at an agreed period.
Real estate tokenisation works almost the same way  — but it’s online and in form digital tokens. Following the creation of tokens, the investment company offers them for sale on a safe trading platform. And they specify the property details and projected return on investments.
Consequently, an investor receives a digital token representing legal ownership of their investment.
How’s this possible?
The whole operation takes place on a virtual record-keeping server called the Blockchain. Yea, the same blockchain you know with bitcoin and ethereum. It’s a essentially a secure online ledger that’s immune to information tampering or hacking.
What makes tokenization attractive is how you can invest on a physical property with low capital and enjoy fast transactions. Which, as you already know, are epic issues plaguing traditional real estate.

Real Life Example Of Real Estate Tokenization

ADDX is a notable Singaporean investment company that trades stocks, bonds, and securities as digital tokens. They explain what real estate tokenization entails in the image below:
And they offer an opportunity to invest in a safe investment platfrom.
ADDX currently offers a fund from real estate corporation, Investcorp, who own a portfolio of US multi-family properties in Texas, Arizona, and Georgia. The investment is expected to yield nice percent (at the time) per annum and you can invest as soon as you sign up.
But that’s where you realise they have a strict screening process. You need to have an annual income of about $200,000 to be eligible or be an accredited investor. It’s a double edged sword — good for security, but disenfranchises many in the process.
A completely different token trading platform is RealT. They offer cheaper investments and have a less rigid screening process. You can invest with as little as $50. But their portfolio only has multifamily and single family units with lower yield as you’ll see below.
 

The Creation of  Real Estate Tokens 

The procedure for creating a digital token is rigid and structured. Most tokens are ethereum-based “ERC-20” or security tokens unlike cryptocurrencies.

Deal Structuring Phase

A token goes through many “certification” phases for safety purposes. No government will legalise an idea that allows owners evade tax or break laws now — will they? Money launderers and scammers can turn online real estate investment into a playground.
Hence, these digital tokens follow protocols that’s applicable to securities, which are safer. Security Token Offerings (STO) must be SEC compliant and pass other regulations.
Also, developers create a self-functioning platform that complies with SEC and tax authority guidelines. For instance, the trading platform should be capable of auto-generating reports.
The company also decides what the token represents in this phase. Some uses include repayment of a sum, unit of deed ownership, project finance, or REIT. They state terms and conditions for capital, gains, resale, risks and restrictions of your investment. So this step is crucial to the survival of any real estate token.

Construction/Digitisation Phase

A tech company takes charge of building the digital assets to regulation standards. With the realty company’s approval, the tech provider creates an ethereum-based token — using ERC20 — to represent shares of the property.
The number of tokens created will determine its unit value. Say they tokenised a 100,000 sq ft hotel worth 600 million. A simple option will be to divide the assets into equal units to cover every square foot. So that leaves you with one hundred thousand tokens worth $6,000 for each.
The company can also limit their public offering to a certain percentage of the asset. Besides, most real estate tokens only represent a stake in the interest (rent) of the property.
Smart contracts also automate periodic business reports like KYC/AML, whitelisting, and more.

Valuation Phase

A token is only as valuable as the cash-flow ability of its underlying property. So, unlike cryptocurrencies, real estate tokens are more predictable and less volatile.
You can tell what causes the downturn in the price of your investment, at the very least. For instance, you know you’ll be at a loss if your rental property struggles to fill vacancies. Or God forbid, if a fire razes the multi-family complex in which you bought a token.
However, it’s all speculations when it comes to cryptocurrencies. And that’s not what real estate tokens are about.
STO investors know the real value of the underlying asset they’re buying and benefit from future appreciation of the asset.

Distribution Phase

Token distribution refers to how it’s sold to the public. But, it also specifies the type of investment you’ll be getting into. I already mentioned project finance, REIT, and crowdfunding as one of the ways to tokenize real estate. To tokenize an individual property, ownership of the property is held by a special purpose vehicle (SPV).
A building tokenized for distribution as private equity is distributed among a larger pool of investors at a lower per unit cost. Tokens are created and sold to investors, and then listed on an exchange so investors can trade their tokens.
There are not many listing options out there, but the list keeps growing. Each investor’s fractional ownership is recorded on the digital ROM, and smart contracts are coded to automate certain corporate management actions including dividend distribution and shareholder voting.

Trading Phase

Trading platforms for real estate tokens aren’t readily available. However, many popular cryptocurrency exchanges are obtaining regulatory approval to list security tokens.
Another option is to partner with an Alternative Trading System (ATS). These are FINRA-registered institutions that sometimes partner with tokenized security asset owners to list security tokens and provide their investors with access to a liquid secondary market. The initial sale of a security token is typically called a security token offering (STO).

Taxation and Legality

Sure, digital assets aren’t an ingenious innovation to evade tax. But that doesn’t mean that the same tax rules apply to real estate tokens. The IRS still gets their share from profits or by taxing the company managing the property. Consequently, it affects investor payout, so they’re still paying taxes indirectly.

Types Of Real Estate Tokenization

Although in small numbers, tokenization of assets has spread throughout the industry. Appwrk, a real estate IT solutions expert classifies them into three forms that captivates its coverage of the billion-dollar industry. I’ll brief them below.

Commercial Real Estate Tokenization

It’s meaning is plain as the day. It’s the creation of these digital properties for stakes in a commercial property. This investment will reduce transaction costs in the sector from a staggering thirty percent to only two percent. What’s staggering is how it breaks the barrier of high-capital entry point. Investors can stake with as little as $100 on projects  that usually cost tens or hundred thousands of dollars for minimum investors. An example of such project is the tokenization of a 600-million hotel in London by Liquefy.

Residential Real Estate Tokenization

It tokenises the fractional ownership of residential real estate for investors, asset owners, and developers and institutions.

Trophy Real Estate Tokenization

This type of tokenization involves converting monumental properties or prime locations into digital assets. In other dispensations, the asset is tokenised to raise funds for special projects.

The Top Benefits Of Real Estate Tokenization

All the convenience blockchain technology offers and more.

Liquidity

Tokenization eliminates middlemen and bureaucracy when selling your share of a property. You can trade tokens faster and at lower costs (like stock market trades) compared to a traditional sale. Selling a token on RealT, for instance, takes 8-14 days. And for owners, they can raise capital without financial intermediaries underwriting the project.

Low Barrier Entry

Another benefit of real estate tokenisation is that its low barrier of entry. A property split into smaller units becomes more affordable for the average Joe. Take the £6.5 million (7.4 million dollars) Anna Villa in Paris for instance. They split the villa into 1 million pieces to bring the investment capital to as small as €6.5.
Also, you can buy interest shares on any property on a marketplace like RealT for as low as $50.

Decentralised Control

The blockchain is a safe ledger for recording token transactions. Nobody can change or delete transactions, plus they are out in the open for everyone to see.
What’s more, the blockchain isn’t controlled by an individual entity. So, investors don’t have to worry it’ll crash like sites of Ponzi scheme investments.
Overall, tokenization gives everyone peace of mind, identity and asset information protection.

Transparency

Smart contracts make it easy to manage digital assets and give real-time insights. Opposed to dealing with an escrow agency and lawyer, you can sell your assets on your own — in a few days.
On a lighter note, fractional ownership is securely managed by a digital register of members (ROM) on blockchain.

Worldwide Investment Reach

There’s literally no territorial barrier. You can invest anywhere you think is rife with opportunity if there’s a token offering. Say, the property is in Texas and you live in Michigan or in South Africa, you can invest easily without traveling to the location.
You can buy tokens for a property in Forth Worth, Texas, while you’re sipping coffee on another continent. Some high-value investments may have strict location restrictions, but are nonetheless still accessible to a multitude.

Strong Record Keeping

Smart contracts are coded to reflect the terms of ownership, and tokens are issued to investors representing fractional ownership of a property.
They also eliminate third-party transactions using programmable actions on the blockchain that facilitate the automation of processes such as compliance checks, investor whitelisting, and post-issuance matters including dividend distribution.

Cost-Effective Transaction

You can escape the expensive closing costs associated with buyer a property traditionally. Aside from receiving a regular profit share, you can sell your tokens to investors on your trading platform. And the cost for secondary trading is only fraction of the cost for closing traditional property transactions.  
Transactions usually take minutes or a couple of days for completion.

Drawbacks Of Real Estate Tokenization

Progress in real estate tokenisations suffers bottlenecks that have stifled progress till date. Here they are:

Regulation Bottlenecks

To understand this, you must be familiar with the histotry of Initial coin offerings ICOs. ICOs like Bitcoin and Ethereum made millionaires overnight, but worthless scam coins followed. Obviously, the government had to do something about it. And this came in the form of a stricter verification process for coin issuers.
But that’s not all it.
For an investment with such revolutionising potential, governments also want to regulate it. In turn, real estate tokens now have to go through the same verification as securities. And comply with the Securities and Exchange Commission (SEC). On average, it could take more than a year to create a real estate token.

Unstructured Distribution

Some tokens may promise a target and come short or fail outrightly. The blockchain does not protect against junk real estate.

Low Institutional Investment

Tokenization is yet to kick off mainstream. Big companies are not investing in tokens enough, so it’s not seeing the PR we expect. In fact, there’s been a drop in media hype since when some large tokenization projects failed. But the future is steady getting back in shape for digital tokens.

What The Future Holds For Real Estate Tokenization

Again, real estate tokenization isn’t mainstream yet but is enjoying an upward spiral. Of course, investors can already buy and sell real estate investment trusts (REITs). But many have high minimuminvestment price tags and represent interest in an LLC. However, digital tokens will make it possible to invest in individual properties that you like.
Tokenization grew the property investment sector by 1.1 trillion USD between 2016 and 2017By 2025 the global real estate market could yield a revenue of up to 4.2 billion USD through tokenization investments.
Aside from investment, tokenization has a helpful application in estate planning. According to Coin Geek, it makes it easier to distribute your assets to friends and family while following your wishes

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