A Brief Introduction To Real Estate Tokenization
Tokenizing real estate property is the process of creating digital tokens that represent ownership of a real estate asset, allowing investors to purchase and trade fractional ownership of the property. These tokens are issued on a blockchain, which is a decentralized ledger that records transactions in a secure and transparent way. The main purpose of tokenizing real estate is to secure the property; that is why the tokens are called security tokens. Every token represents direct ownership of the real estate property.
How Tokenizing The Real Estate Property Works?
The tokenization process begins with the selection of a property that is suitable for fractional ownership. This could be any type of real estate asset, like a share in a company owning real estate, a piece of real estate property, or simply just participation in a real estate investment fund, etc. The property is then appraised, and the ownership structure is established.
Next, the real estate asset is divided into a finite number of digital tokens, each of which represents a fractional share of the property. For example, if a property is valued at $10 million and 1,000 tokens are created, each token would represent a $10,000 ownership stake in the property.
Investors can then purchase these tokens through an exchange platform, using either cryptocurrency or fiat currency. The tokens are stored in a digital wallet, and investors can trade them with other investors on the platform.
Types of Real Estate Tokenization
- Commercial Tokenization – In this type of tokenization, the ownership rights of commercial properties with legally-compliant protocols, like office spaces, storage warehouses, shopping centers, etc., are tokenized.
- Residential Tokenization – It is the lucrative process of tokenizing the fractional ownership of residential real estate properties for asset owners, investors, developers, and institutions.
- Trophy Tokenization – In this tokenization type, the typically iconic buildings located in prime locations with strong real estate value are tokenized.
What is the need To Tokenize Your Real Estate Property?
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Liquidity
Real estate tokenization is a process that solves the biggest issue, liquidity. In traditional real estate transactions, there are various parties involved in the legal transfer of assets, which makes it a complex and time-consuming process. However, tokenization simplifies the buying and selling of properties by omitting the middleman and allowing a direct transfer of ownership from one investor to another investor.
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Proof of Ownership
Another advantage of tokenization is that it provides proof of ownership through a distributed ledger that is shared and synchronized across multiple sites. This ensures that ownership rights are clearly defined, and any changes in the ledger are copied to all participants in a matter of seconds.
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Easy Property Search
Tokenization also makes it easier to search for properties and eases the investor’s job. It also allows sellers to gain access to more potential buyers.
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Increased Transparency
Enhanced transparency is another benefit of tokenizing real estate. As this process is supported by blockchain technology, it helps to improve the visibility of the property in the real estate market.
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No Entry Barrier For Small Investors
Real estate tokenization helps to break the entry barrier for small investors, as assets are divided, making them more accessible for smaller investors. Also, it enables the investors to invest without having to hassle around with the legal process of transferring the ownership of the asset.
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Less Transaction Cost
Using blockchain technology, transactions are faster and cheaper with no middlemen involved. It also decreases transaction costs significantly for exchanging tokens, enabling investors to sell and buy property without incurring traditional closing costs. Even though the Real Estate Investment Trust (REIT) offers a similar value proposition, they involve upfront fees and mandate a minimum investment of high value.
Our Fluent Process Of Real Estate Tokenization
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Deal Structuring
The initial stage in tokenizing the real estate asset is deal structuring, which involves considering various factors such as the asset type, shareholder type, jurisdiction, and applicable regulations. Issuers typically opt to tokenize an existing deal to provide liquidity to current investors before raising funds for launching new development.
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Digitization
In the next stage, the legal structure of the process occurs, where information traditionally stored in paper or document form is uploaded to the blockchain. This information is then coded in smart contracts, and security tokens are issued. Different legal structures can be used in this tokenization.
- Single asset Special Purpose Vehicles (SPVs): The tokens in this structure represent the share of SPV, and institutional buyers or accredited investors are the only ones qualified for this type of structure.
- Real estate fund: This type of structure is basically a private equity fund where the investors invest in a portfolio of properties, and the token represents a unit in the fund.
- Project finance: The projects can leverage tokenization to raise funds, and the tokens are made available for interested retail investors and accredited investors.
- Real Estate Investment Trusts (REITs): This type of structure benefits retail investors immensely, even though it is a bit expensive to operate. The REIT investors and the real estate token holders can create digitized shares in a REIT and operate incomes from REIT.
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Technology Selection
Once the deal structure is in place, the next stage involves selecting the appropriate technology.
- Selecting the Blockchain/Token: When creating a real estate token, it’s crucial to carefully consider various factors to ensure the success of the project. One important factor is selecting the appropriate blockchain platform to record the token. Additionally, data transfer restrictions need to be implemented to regulate the token’s usage.
- Custody: To maintain security, a reliable custody solution must be put in place to store the real estate tokens securely.
- KYC/AML verification: It’s also essential to perform KYC/AML verification of investors to ensure that digital securities are only offered to legitimate investors.
- Primary and secondary marketplaces: Deciding on the primary and secondary marketplaces where digital securities will be offered to prospective investors is critical. The success of the capital raise and the accessibility of liquidity for investors depend heavily on this decision. Thus, careful consideration must be given to selecting a suitable marketplace for digital securities, whether via primary issuance or leading secondary exchanges.
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Distribution and Marketing
This step involves creating and distributing digital real estate tokens. Different payment methods can be accepted, such as cryptocurrencies, stablecoins, and fiat currencies. Investors require a digital wallet to store their tokens, which can be accessed on both web and mobile platforms.
- Primary Distribution: This process involves distributing the tokens to investors in exchange for their investment capital. The investors’ information is recorded on the digital ROM to ensure transparency and accountability.
- Post-Tokenization Management: The next crucial step is to ensure the smooth running of the project. This process involves various corporate actions, including shareholder voting and dividend distribution, which can be automated using smart contracts coded on the token. This management process continues until the maturity or redemption of the token.
- Secondary Trading: In this, the true value of tokenization in enhancing liquidity is realized. In secondary trading, real estate token holders can trade their tokens with other investors either on an exchange or in an over-the-counter arrangement. This trading allows investors to sell their tokens to others interested in investing in the real estate project. It also allows investors to diversify their portfolios and manage their risk effectively.
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Post Support
In this stage, as a leading real estate software development company, we provide additional support to investors, including mortgage issues, regular tracking of token holder activities, formulating a corporate code, and handling legal issues.
Valuable Advantages Of Tokenizing Your Real Estate
- Tokenization enables the division of large upfront capital requirements into smaller fractions, making the investment in assets more accessible to a wider pool of investors. Blockchain technology ensures the secure management of fractional ownership through a digital register of members.
- The automation of various processes, such as investor whitelisting, compliance checks, and post-issuance matters, is facilitated by smart contracts on the blockchain, leading to operational efficiency.
- The flexibility of real estate tokenization allows anyone to invest a specific amount and become a partial property owner, benefiting from the generated profits. Token holders can easily sell these tokens on the secondary market at higher rates, making tokenization a better option for crowdfunding.
- Tokenization provides trust and confidence in real estate investors, as transactions are digitally recorded on the blockchain and cannot be altered.
- It also reduces settlement time significantly compared to traditional finance transactions. Tokenized transactions can be settled almost instantly, whereas traditional transactions take days or even weeks.
Why Infinite Block Tech Is The Right Choice for Your Real Estate Tokenization Venture?
Real estate tokenization is a promising new venture employed with blockchain technology’s support. As the technology continues to evolve, we can expect to see more real estate assets being tokenized, leading to a more liquid and accessible real estate market for investors and consumers alike. Also, the constant growth of the blockchain industry creates an excellent space for you to enact tokenizing your real estate property. With our expertise in the blockchain industry and adept knowledge of tokenization, we assist you efficiently to securely and affably tokenize your real estate property.