The real estate market has issues that end up making housing more complicated for buyers, sellers, and investors. Millennials and younger generations are finding it harder to buy their first home due to inflated prices in most areas, and many of us lived through the 2008 economic crash that resulted from bad lending practices and location-specific housing bubbles. On top of that, high housing costs in urban areas and predatory rental agreements have resulted in unnecessary complexity and limited accessibility.
Asset tokenization—the practice of utilizing the blockchain to turn a physical asset into a liquid, fungible token—could be used to remediate many of these problems. But could it really work?
Asset Tokenization Basics
In case you aren’t familiar, asset tokenization allows you to transform any meaningful asset (including physical assets and intangible assets, like intellectual property) into a digital token that can be exchanged like currency, or like shares of stock within the stock market. There are many different angles you can take with tokenization, and many competing philosophies for how it should be executed. However, the basic principles typically remain the same.
If asset tokenization were applied to the real estate market, this could allow individual properties—which historically have sold as single units—to be bought and sold in terms of tokens, or shares of equity. But what exactly are the benefits, and what would this mean for the future of the real estate market?
The Benefits of Tokenized Real Estate
Let’s look at some of the top benefits of tokenized real estate:
- Accessibility. First, tokenizing properties could instantly make them more accessible. If you’ve always wanted to invest in real estate, but you never had the capital to do it, you would now have the opportunity to invest in a small portion of an existing property. If you’re buying your first home, you may be able to buy in with a lower initial down payment, and gradually accumulate tokens as shares of equity in the home.
- Higher liquidity. One of the downsides of real estate is its illiquid nature. If you decide to rebalance your portfolio, or if you suddenly need the cash, there’s no guarantee you’ll be able to sell your property. But with tokenization, you should be able to sell a portion of your equity in the property more readily.
- Rental options. Today, homeowners are increasingly turning to options that allow them to rent their property to others, whether it’s renting a room to a long-term tenant, or listing the property on a site like Airbnb. Via asset tokenization, there could be a wider variety of options for tenants—including the ability to earn tokenized shares of the property in exchange for their recurring rental payments.
- Real-time pricing discovery. With price fluctuations in the asset token market, investors and property owners can monitor price change in real-time, rather than relying on periodic appraisals or making predictions based purely on the conditions of the surrounding neighborhood.
- Lower transaction costs. As with most forms of cryptocurrency, there’s significant potential for lower transaction costs. In the real estate world, this is extremely important, since getting a mortgage and securing a deal can be extremely costly.
- Group purchasing power. Tokenization also lends itself to group purchasing power. It’s easier than ever to buy a property with other people, which is ideal if you intend to live together.
The Challenges of Tokenized Real Estate
Of course, it’s not so simple to achieve these benefits in practice. There are several hurdles that prevent us from realizing tokenized real estate:
- Integrations with current systems. Optimizing a tokenized real estate exchange would be difficult considering current systems; for example, how would you record the deed without the help of a titling company?
- Regulatory hurdles. Countries are still trying to figure out how they want to handle cryptocurrency. New forms of tokenized assets would be even more complex to figure out.
- Price stability. As we saw with Bitcoin in 2017, when new, poorly understood forms of currency emerge, pricing tends to be a bit unstable. This can make the market unpredictable, at least for a time, following the adoption of a tokenized form of exchange.
- Consumer confidence. If this system is going to become widespread, people need to have faith in it. It would take some time and demonstrated benefits to persuade the general public to go along with it.
- Marketing. Marketing a real estate transaction is easier said than done. Between securities laws preventing or restricting general solicitation and the general difficulties of making opportunities known, marketing a real estate deal is equally important and difficult.
- Technical difficulty. There are also several technical hurdles that need to be overcome. For starters, someone needs to develop the blockchain infrastructure necessary to allow the tokenized exchange to take place. Beyond that, consumers, homeowners, and investors would need to learn how to navigate the system, and cryptocurrency has proven challenging for average people in the past.
Asset tokenization could be a powerful force for the future of the real estate market, and many other markets. But for now, it seems relegated to speculative territory. As the world becomes more familiar with the power and functionality of the blockchain, we may gradually shift to a more digitized, accessible, and secure world.
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