May 18, 2023

What is Real Estate Tokenization?

Tokenization means transferring ownership of an asset into digital tokens. When real estate is tokenized, it is divided into small pieces, allowing for its fractional ownership.

Historically, real estate has been an illiquid market with a high barrier to entry. Investors need a huge amount of money and time to buy and sell properties in a traditional way. 

Real estate tokenization allows you to invest as little as $50 in a property that is thousands of miles away from you in just a few clicks. Never before in history has it been possible to become a co-owner of a property spending so easily. 

Not the first try 

Tokenization is possible today since blockchain technology has become widespread and proper legislation has been developed. However, it is not the first attempt to democratize real estate investment. 

Starting from the 20th century, this niche has been occupied by REITs – real estate investment trusts. These companies act like mutual funds: they collect the capital from multiple investors, then buy the properties, and distribute income. They do offer a lower barrier to entry for small investors and a stable passive income. 

However, this approach has its drawbacks. First, investors themselves don’t own properties, and  their revenue depends fully on the trust’s policy. Second, investors are not entitled to capital appreciation: they barely profit from the property price growth. Third, there’s a way to go in terms of transparency. 

What is real estate tokenization? 

When a property is tokenized, its ownership is transferred onto the blockchain and turned into digital fractions, or tokens. Anyone can buy as little as one fraction starting from $50 or $100. All is done in compliance with the law, and the terms of purchase and sale are written in the smart contract. 

The buyers of the tokens become the owners of the property in the real world. They are entitled to all the bonuses that this status brings – rental income and property appreciation. Rent accrues on a monthly basis and is available for withdrawal, while appreciation means the user’s property tokens will steadily grow in price. 

For real estate sellers, tokenization opens the opportunity to sell their properties fast. In the traditional market, they would have to look for one investor who is ready to pay a gigantic sum at once. That search takes time. In the tokenized real estate market, multiple small investors come at once and quickly collect the necessary sum, facilitating the sale for the property owner. 

How does real estate tokenization work? 

In the previous paragraph, we demonstrated how owners can sell a property to hundreds of people via tokenization. In this sense, buying tokenized real estate is much like crowdfunding: everyone contributes a small sum, and when the capital is collected, it is sent to the seller to strike a deal. 

Apparently, we have a lot of buyers from different countries who paid different sums of money. Here comes the question – how do we transfer the property to them as a whole, while ensuring the opportunity to flexibly resale the tokens? 

Binaryx Platform solves this problem by creating a new DAO LLC for each tokenized property. Here’s how this works step-by-step: 

  1. When a new property is on sale, we establish a new company officially registered as a DAO LLC in Wyoming. This state has recently adopted a new law allowing for this procedure. 
  2. This DAO company raises capital by selling its governance tokens to users. Users who buy these tokens become co-owners of this company. 
  3. Raised capital is sent to the previous owner, and the DAO company buys the property. The company’s co-owners (token holders) become co-owners of the property. 

To explore the fine details, read How Do You Own a Property in the Real World via Real Estate Tokens? 

Benefits of tokenization 

Tokenization unlocks the following perks for both sellers and buyers: 

  • Increased liquidity. Selling an asset worth $100,000 and more isn’t easy – it takes time and effort. On the contrary, real estate tokens worth $50 each can freely move across the market, allowing for flexible trades and better capital efficiency. 
  • Lowered barrier to entry. Throughout most of history, real estate investment was only accessible to the wealthy. Today, anyone can afford to own a $50 fraction of a tokenized property. 
  • Diversification. Such a low price for real estate tokens opens an opportunity for collecting a diversified portfolio of properties from across the globe. In the case of local market downfalls or bubbles, “eggs placed in other baskets” will balance out the losses.
  • Transparency and efficiency. The transparent nature of the blockchain makes all real estate trades immutable and visible to everyone. Near-instant settlement of transactions allows for fast and efficient value exchange.  

Investing small sums in real estate fast has never been possible before. The ability to trade the asset and collect a diversified portfolio is the benefit unlocked by tokenized real estate. For an ultimate breakdown of perks, see 5 Reasons to Invest in Tokenized Real Estate.

The ultimate goal of tokenization 

If you’re reading this, you must be searching for worry-free passive income opportunities. Tokenized real estate offers just that. To explore how you can earn from fractional property ownership, read How to Earn Passive Income with Binaryx Platform.