Tokenization of Real Estate: What, Why, and How
Real estate has nearly always been considered a relatively safe investment. After all, whatever happens in the stock market, people will always need a place to live and work. Yet, real estate transactions also tend to be some of the most complex and expensive, rendering real estate itself relatively illiquid.
In recent decades, securitization has had some success in making real-property interests easier to deal in. But a new method of engaging in such transactions promises to go even further in transforming the purchase, holding, and sale of real property: Tokenization.
Tokenization involves representing ownership of an interest in real estate with virtual tokens that exist on a blockchain (forming a type of security token). The core technology is the same underlying the popular cryptocurrency Bitcoin and the many initial coin offerings that have characterized the last year and a half but adapted to be compliant with securities regulations.
Tokenization and the blockchain offer numerous advantages over traditional methods of dealing in real estate. These include increased liquidity and transparency, enhanced security, and simplified management.
But tokenization is also a highly complicated process, both technically and legally. Companies interested in launching a real-estate-backed virtual token must carefully consider and resolve a wide range of issues when planning, developing, and launching their real-estate token.
What is the Tokenization of Real Estate?
Tokenization is the process of creating a virtual token to represent ownership of a real estate interest. Rather than dealing with regular real estate interests in an outdated manner using paper documents, purchasers are able to engage in transactions digitally using tokens.
Tokenization is flexible: A token could represent ownership of the underlying real asset, an equity interest in a legal entity that owns that asset, an interest in a debt secured by the asset, a right to share in profits arising from the use of the asset, or more.
The types of the real property involved can also vary widely, including single-family homes, multifamily structures, office buildings, warehouses, retail spaces, and everything in between.
Although this may sound like science fiction, several models of real-estate tokenization are already being actively developed, such as:
- Ownership of real estate through a special-purpose vehicle (discussed in more detail below);
- Shares in real-estate funds;
- Investments in and loans to development projects; and
- Tokenized REITs.
Let ETS Bring Your Real Estate Deals Into The Digital Age
Engineered Tax Services is adding a real estate tokenization platform that uses blockchain technology to create security tokens representing fractional interest in real estate assets.
To get started with your first asset tokenization, please complete our short introductory onboarding process and we’ll be in touch with more details.