Real estate tokenization is an emerging trend representing the convergence of real estate investing and blockchain technology. Tokenization helps asset or fund owners raise capital more efficiently, and gives investors unprecedented access to private real estate investments, transparency, and liquidity.
In this article, we’ll explain what tokenization means, how owners and investors can benefit, and how the tokenization process works.
What does it mean to
“tokenize” a real estate asset?
Tokenization is a relatively new term used to describe a cryptocurrency fundraise in which investors exchange fiat or crypto currency for “tokens”.
In a nutshell, tokenization is one way to securitize real assets.
To securitize an asset means to divide it into shares that you can sell to investors. In the same way, to “tokenize” an asset is to divide it into shares, or “tokens”, that represent a predefined share of the underlying asset. They are therefore often called “security tokens”.
These tokens are secured through the immutability of blockchain technology, and they’re tradeable via crypto exchanges or Alternative Trading Systems (ATS).
Creating a new real estate token
When an asset owner decides to tokenize a property, an Ethereum-standard (ERC20) real estate token(also called a security token) is created to represent shares of the property. The total value of all tokens will be equivalent to the total value of the securitized asset. Let’s look at a simple example.
Suppose you want to tokenize a 100,000 sq ft property that’s worth $30M. A simple way to divide the property into shares is to offer one share for every square foot. So you would divide the property into 100,000 shares, each representing one square foot of the property and valued at $300.
Alternatively, you could divide the property into square inches, in which case each token would be worth $2.08. You might choose this option to make your project accessible to a wider range of investors. Of course, you could also choose to limit the share offering to a certain percentage of the asset – say 20%, to retain majority ownership while raising funds for a new wing or renovations, for example.
The next step is to sell the tokens to investors.