Do you have questions about buying real estate with cryptocurrency? Or need some more guidance on digital properties? Congratulations, you’re at the right place. This article offers a quick rundown for beginners on the tokenization of real estate- the pros and cons. Thus, if you’re familiar with cryptocurrency, need a quick refresher, or are an absolute novice starting your research, you’ll enjoy this piece. Let’s get started:
What is Tokenization in Real Estate
Have you ever wished you could own a piece of property? So that you can earn fractured returns on your fraction of land. Well, that’s what tokenization in real estate essentially does.
Since the dawn of the real estate industry, divisibility has always been one of its most significant drawbacks. As a property owner, you could only sell your land to someone willing and able to buy all of it. Likewise, as an investor, your options in the physical world are limited to the neighborhoods you can access and purchase. However, with the advent of blockchain technology, the public can subvert this once indivisible hurdle.
Thus, to put it simply, tokenization of real estate involves making properties available for purchase in small fractions called tokens. These tokens are stored on a decentralized database, which automatically records any transaction involving these pieces on a digital ledger.
Since real estate tokens are similar to NFTs, each is unique and unreplaceable. It is also impossible for two people to own the same token. You can think of each person having an individual square foot on a thousand squared-foot property.
Pros of Real Estate Tokenization
1. It Makes Investing in Real Estate More Affordable
One of the best benefits of real estate tokenization is that it makes investments more affordable for the general public. With digital properties, there’s no need to save up a chunk of cash or look for low-interest loans. Instead, you can easily acquire a token with whatever amount you have.
2. It Requires Less Maintenance
While you might require a detailed property management team to maximize your physical rental investment, digital real estate works differently. For the most part, investors even regard it as passive income. Tokenization ownership does not require the standard maintenance practices of physical property like refurbishing and repairs.
3. It’s Much Easier to Liquidate Your Investments
Another plus of owning real estate tokens is that they’re much easier to liquidate than physical assets. Since these fractions are much cheaper than their real-world counterparts, it’s easier to get a buyer to relieve you of your assets when you no longer want them or need cash.
4. It is More Transparent
Real estate tokenization works on the principle of blockchain. In other words, the ledger is available worldwide for users to see. Also, the blockchain is secure, making it difficult to tamper with the critical information it stores. Thus, you can always confirm legal ownership of a token before you pay. Besides, the process also cuts out clunky intermediaries that can increase the price.
Cons of Real Estate Tokenization
1. It Diminishes Your Returns
Unfortunately, one of the best advantages of virtual real estate investing goes hand in hand with one of its most significant flaws. Because they’re much smaller, owning real estate tokens is often not as lucrative as their real-world counterparts. After all, owning one out of a hundred pieces means you only get 1% of the total profits.
2. Opportunities are Still Limited
Real estate tokenization makes property ownership easier to achieve, but opportunities for this investment aren’t plentiful. Some people would even say the market is saturated already, making it harder to break into if you don’t have the correct information. Besides, owners with these tokens know they’re holding scarce assets, which could also drive up the price.
3. It is not as Regulated as Physical Real Estate
Another disadvantage of real estate tokens is that they’re not regulated like physical real estate. To a significant extent, regulations vary from one locality to another. Also, licensing often depends on your location and which platform you use. As a result, tax laws can be vague and hard to reconcile, unlike physical real estate.
So there you have it! Tokenization of real estate presents an opportunity for every investor, whether big or small, to tap into the lucrative business of managing real estate properties. Some benefits of real estate tokenization include making real estate more affordable, spending less on maintenance, and high liquidity. But on the other hand, smaller fractions also mean smaller returns, and the lack of regulation can make the process risky.
While this article is a good start, you should perform your due diligence if you’re looking to invest in digital properties. You can also acquire the aid of a professional property management company to make the process smoother.