Real Estate Tokenization has the potential to revolutionize the entire real estate industry. Naysayers have recently touted that the tokenization boom is over following the spike in interest in 2018 and 2019. Like other disruptive technologies that have faced headwinds in finding a firm footing. Tokenization of real estate is no different.
Although Bitcoin and Real Estate Tokenization are distant cousins—they both run on a blockchain, but that’s where the similarity ends—blockchain technology as a whole continues to prove itself despite some of the largest setbacks in the tech industry. Just like in the Wild West, the lawlessness of the land is being tamed but the freedom to try new things has led to innovations that have literally changed the world.
Wealthward Capital’s purpose is to help hardworking tech employees turn their earnings into passive income. We want your money to work for you just as hard as you have worked for it. Because of this, we’ve structured a number of Real Estate Investments in such a way that they bring cash on cash return—meaning actual dough in your pocket from the dough you put into the investment. If a passive income investment is not actively paying you every month or quarter, then it’s not worth putting your money into it.
And that’s exactly why we’re doing our due diligence on tokenizing real estate right now. We see the enormous potential of tokenization in the real estate industry, but we also see the hype. Hype is okay. In many cases, it’s also necessary. Too much hype that isn’t backed by a solid structure behind it can bring everything crashing, as happened in the recent Terra Luna collapse that rocked the crypto world. Terraform Labs was simply offering too much return too fast, and it wasn’t backed by enough structure behind it, and a lot of good people lost money.
We don’t want to do that to our investors, but we do want to offer you cutting-edge investment opportunities.
We’re determined to help you make money with your money, which is why we’re digging deep into this space, learning who the key players are, how tokenized real estate assets works, and how best to structure it for our passive income investors.
I started Wealthward Capital to help other tech employees learn how to make money with their money. Part of that help is to provide transparent information about everything I know in the space of investment.
What follows is an explanation of Real Estate Tokenization, its potential, and even some basics on blockchain technology so you can fully understand what this technology can do for passive real estate investing.
Everything You Need To Know About Tokenizing Real Estate
If you already know about cryptocurrency and blockchain technology, you may feel comfortable skipping the first few questions.
What is blockchain technology?
A blockchain is a type of immutable ledger, meaning that it cannot be changed once it is "written" on. Blockchain technology is used to track both tangible and intangible assets such as real estate assets, vehicles, cryptocurrency, intellectual property, etc.
A blockchain could also be called a "data-chain" because a blockchain is a linked sequence of blocks of data. Each block of data contains a unique fingerprint (called a hash), as well as the hash (fingerprint) of the previous block.
Because the blocks contain hashes (fingerprints), they link up with the block before it and the block after it. It is impossible to change the data in an earlier block because a new hash (fingerprint) would be generated for it, and this hash would not match with the hash in the block following it, and every block after it. This is why blockchains are immutable. It is also why blockchains have become so popular for systems that require complete transparency because it is impossible to modify any previously recorded data in the chain of blocks (data).
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Is blockchain technology the same as cryptocurrency?
Blockchains are the means for storing data—any data you please, such as deeds, artworks, contracts, or pieces of real estate. Cryptocurrency is a currency, like the US dollar or the Euro, but it is a digital currency. Cryptocurrency is just another form of data.
The first widely distributed blockchain was the Bitcoin blockchain. This blockchain is quite limited because it can only store Bitcoin data and nothing else at all.
Other versions of blockchains have been built since then which allow the storage of almost any other type of digital data. The most popular of these new blockchains is by far the Ethereum blockchain.
What are smart contracts?
Smart contracts are programs that run on a blockchain. They are programmatically designed to either completely succeed, or completely fail. So, if a smart contract's conditions are not met, the transaction (or contract) does not go through.
Smart contracts are one of the largest breakthroughs in blockchain technology and are what makes tokenization possible in real estate investing. A smart contract can be used for real contracts, or to hold money in escrow until certain conditions are met. The possibilities are endless.
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What are tokens in blockchain technology?
Tokens are sometimes also called crypto tokens. They are programmatic units of value that sit on top of an existing blockchain. Tokens are almost always created using a smart contract, or at least supported by a smart contract.
It is not possible to create tokens on the Bitcoin blockchain because that blockchain does not support smart contracts. A new blockchain, called Ethereum, introduced this functionality. This is what led to the blockchain boom that we see happening today.
Tokens don't always equate to cryptocurrency or even to monetary value.
It is this very possibility that has opened the door to owning a piece of various real estate assets through a digital token. The token can be programmed to represent a physical asset, or part of that asset. Because the blockchain it runs on is immutable, ownership can be verified easily and never forged.
The type of tokens that represent ownership in a security are called Security Tokens.
What are tokens in blockchain technology?
Tokens are sometimes also called crypto tokens. They are programmatic units of value that sit on top of an existing blockchain. Tokens are almost always created using a smart contract, or at least supported by a smart contract.
It is not possible to create tokens on the Bitcoin blockchain because that blockchain does not support smart contracts. A new blockchain, called Ethereum, introduced this functionality. This is what led to the blockchain boom that we see happening today.
Tokens don't always equate to cryptocurrency or even to monetary value.
It is this very possibility that has opened the door to owning a pieces of real estate assets through a digital token. The token can be programmed to represent a physical asset, or part of that asset. Because the blockchain it runs on is immutable, ownership can be verified easily and never forged.
The type of tokens that represent ownership in a security are called Security Tokens.
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What is real estate tokenization?
Although tokenization in the real estate market can be compared with crowdfunding, it is far more sophisticated than that. By creating a security token offering of real estate investments on a blockchain, you provide an immutable record of ownership of a part of a real estate asset.
By using smart contracts, it is possible to have real estate tokens represent a physical real estate asset. People then buy these tokens as if they were buying securities on the stock market. The value of the tokenized real estate is pegged to the underlying value of the real estate investment and provides direct ownership of the physical assets.
There are now a few blockchain platforms on the market that allow you to tokenize a piece of real estate.
Why is real estate tokenization so revolutionary?
Real Estate Tokenization democratizes the ability to own real estate while simplifying the procedure for obtaining it. It has the potential to revolutionize real estate investing and the entire industry, which is why it has gathered so much attention in the past few years.
Real estate transactions are greatly simplified through tokenization. Ownership is transparent and fractional ownership is possible. And digital assets are backed by tangible assets which makes the token stable.
What are some of the benefits of tokenization in real estate?
Here are some of tokenization's revolutionary benefits:
- The ability to own a piece of property instead of the entire property. This opens the door of real estate investment to everyone, no matter their financial means.
- Liquid investments. Parts of real estate can be bought and sold quickly on the blockchain. Allowing property owners to have longer holds and investors
- Transparent and immutable record. Every piece of ownership is recorded on the blockchain, which is immutable. Lowering fees from title companies.
- No more need to sign a 50- or 60-page document before buying a piece of property. You can just sell or buy on the blockchain.
- Everything is run by a smart contract so there is no room for error in each transaction.
- Real estate owners can finally hold real estate in perpetuity to continue to receive cash-on-cash returns from it. Currently, real estate investors typically have to sell an entire investment to obtain liquidity from it. Although they receive the cash, the asset is now gone. With tokenization, owners can sell part of the asset to obtain liquidity as needed. This also reduces the size of the taxable event if the entire property is sold.
- Owners of tokens can clearly see the value of the underlying property—and, therefore, their token—by looking at a simple Profit and Loss (P&L) statement or balance sheet of the underlying asset.
- Real estate owners can potentially sell debt tokens to purchase properties, thereby changing the loan-mortgage paradigm.
Tokenization solves some of the big problems in real estate investment and that’s why Wealthward Capital is doing its proper due diligence on it, so we can become a leader in the space as soon as we see that it would be a good move for our investors.
What gives investing in real estate tokens an advantage over investing in cryptocurrency tokens?
Real estate tokens are backed by a real, tangible asset. This is one of the largest problems with cryptocurrency—it’s an idea that doesn’t have actual assets underneath it. That’s why Bitcoin’s price fluctuates so wildly sometimes.
The recent Terra Luna cryptocurrency crash brought this home to many with a bang. Terra Luna was supposed to be a “stablecoin”—a cryptocurrency coin that is backed by a real asset—but it wasn’t. Its algorithm got manipulated (either intentionally or unintentionally) and the entire investment came tumbling.
Tokenization of real estate is the process of representing actual, tangible, physical real estate objects on the blockchain. These representations (think of them as “digital, immutable, unhackable deeds”) can then be traded transparently and liquidly. The token can’t overnight because it isn’t merely an idea. There is an actual asset underneath that represents it.
If the real estate property’s value diminishes, only then can the token also lose value. But the value of real estate rarely diminishes if it is properly managed, such as the investments in Wealthward Capital’s portfolio.
How big is the real estate token market?
According to Security Token Market's 2022 Real Estate report, the market cap for Tokenized Real Estate currently sits at over $51 million, up 70% from January 2022. The February 2022 trading volume was $113,424.14, up over 11%.
Blockchain continues to lead the way in terms of innovation and these numbers will likely continue to grow.
How do I invest in tokenization?
The company offering the real estate token will let you know which exchange to sign up for. After opening an account, you will likely be asked to verify your identity, and then you'll be able to buy real estate tokens just like any other stock.
You should also subscribe to Wealthward Capital’s newsletter. As soon as we open up a tokenization option, we will inform you.
Currently, Wealthward Capital only accepts accredited investors. That will very likely change if we start offering tokenization options, which democratize Real Estate Ownership for everyone.
Is real estate tokenization legal?
Yes, real estate tokenization is perfectly legal. Of course, any blatantly fraudulent activities would come under the scrutiny of the appropriate authorities.
As with all investments, you should always perform the necessary due diligence before putting your money into it. Wealthward Capital hopes to become a leader in this space, providing as much transparent information to new investors as possible.
How do you tokenize your real estate?
You need to divide the real estate you want to sell into specific parts, such as offering a share per square foot. Then you need to partner up with a company that offers blockchain tokenization services and gets a token created for your piece of real estate.
There are now companies that provide the necessary security token blockchain as a readymade service so that you don't have to invest in building your own blockchain.
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What are the benefits of real estate tokenization?
Real Estate Tokenization provides fractional ownership of a property, even large properties such as a multifamily property or commercial real estate. The minimum investment for real estate tokenization is often extremely low.
Real estate tokenization offers more liquidity in one of the largest asset classes. If you don't have a lot of initial capital to invest, real estate tokenization might be the right investment for you.