The age-old advice for real estate investing must evolve. It is true that in real estate the imperative is “location, location, location.” But now we must add to that mantra “liquidity, liquidity, liquidity.” It is time to modernize the real estate industry — it’s time for tokenization.
Typically, real estate transactions are slow and complex because there are too many middlemen and there is too little technology involved. More often than not, when people think of investing in real estate, they think of a longer-term investment. But that does not have to be the case. Real estate assets may indeed have traditionally been illiquid. But once you tokenize a real estate property — effectively use technology to divide it up into tradable shares — you can create a highly liquid asset out of highly valuable real estate.
How does it work? Real estate tokenization allows property owners to issue tokens through blockchain technology platforms. These tokens represent a certain amount of ownership for a real estate property. Other investors can then purchase these tokens, and by doing that, they become partial owners of that asset. This “fractional ownership” opens the way for them to be involved in the cash flows and asset appreciation of the real estate. At the same time, they can choose to sell any amount of their shares whenever they want and they can do this through dedicated online marketplaces.
This innovation in real estate investing benefits both buyer and seller thanks to the improved efficiencies in executing the transactions. On the one hand, developers gain wider access to capital for their projects and, on the other, many more buyers can invest because of the lower barrier to entry because it is far easier to buy or sell a piece of a multi-million dollar property than the whole asset all at once.
Blockchain technology keeps an automated record of all the shares and owners through a “smart contract”, which is not managed by any one party and, at the same time, is trusted by all involved. This nascent technology, which has created efficiencies in industries from supply chain to insurance, can also deliver automated “dividends” to investors. Essentially, if an investor buys a share, or token, representing fractional ownership in a property, that investor has the same kind of rights that a traditional property owner would have.
For example, in the case of multifamily developments, the token owner receives an automatic payout of a proportion of the rental income collected at the property. In other words, he effectively earns a monthly dividend. Obviously, an investor can then choose to cash out that dividend, or immediately use it to buy more shares and compound his investment.
Prior to blockchain, this kind of tamper-proof, efficient automation of all the data involved for all the parties was not possible. Before the technological innovation, record-keepers were needed to manage the information and that created a cost impediment that negated the benefits of fractional ownership. Blockchain is a new solution making illiquid assets liquid through tokenization. And a great place to take advantage of its innovation is in real estate investing — as long as smart investors understand the importance of “liquidity, liquidity, liquidity.”
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