Democratizing Ownership: How The Future of Real Estate Investing Is In Tokenization

By Dan Simerman, Head of Financial Relations at the IOTA Foundation

Owning property, especially property that produces income, has long been one of the fastest paths to generational wealth. Though the barrier to entry is high, those who can afford to play the game reap substantial rewards.

Tokenization levels the playing field to some degree, allowing even those among us with less capital to leverage the concept of fractional ownership to own a portion of an expensive asset - whether that be a condominium, vehicle, business, or piece of art. The impact of tokenization is broad and applies to just about anything of value, but today we’re going to focus solely on one of those investments: real estate.

Let’s start with an example. Imagine a 100,000-square-foot office complex, subdivided into numerous co-working spaces and small office units for startups. Let’s assign this fictional building an estimated value of $1,000,000.

Traditionally, there are three ways to acquire this asset:

1) Pay $1,000,000 in cash

2) Put down 20% (or more) and take out a bank loan

3) Find investors willing to fund your venture

With tokenization, we can add a fourth method, one that serves as both a tool for investment and acquisition, affording individuals the opportunity to participate in investments that would otherwise have been impossible in the past.

Using tokenization, we can split ownership by thinking of the 100,000 square feet as 100 equal parts, or shares, each of which is 1,000 square feet. Now, the office building requires only 100 people willing to invest $10,000 for an equal share of the monthly rents. There’s some flexibility here. Those who want to take a chance on even bigger profits can buy more shares. $100,000, for example, buys you 10 shares of the office building, and 10x the profits, potentially.

These numbers work regardless of how you decide to split up ownership. Instead of 100 people willing to invest $10,000, for example, maybe you find 1,000 people willing to invest $1,000. Or 10,000 people willing to invest $100. You can break this down as far as you want, leading to micro-investments of $1, or less.

This is a powerful concept. Once priced out of the investing game, even those with less capital would have opportunities to grow their wealth with fractional investments in income-producing properties. For the first time in history, we’re on the verge of a world where anyone can invest in assets that were once out of reach. Compounding their returns, they can then invest more into other assets, an opportunity that didn’t exist even a decade ago.

A $40 allocation into a property, for example, might not seem like much to most of us, but for a lot of investors, it’s a reasonable and achievable investment.

It’s not life-changing wealth, by any means, but investing has numerous benefits that aren’t immediately recognizable. What separates the wealthy from the rest of us is in the opportunities made available to them that aren’t readily available to the majority of the population. The vast majority of their money is tied up in investments designed to increase their wealth that produce higher yields than parking your cash in an interest-bearing bank account. For them, their money is always working, even when they aren’t.

But it’s not just income. Owning assets brings additional benefits, such as those that reduce your tax liability, or increase your ability to get a loan by acting as collateral. Most of all, it acts as a store of wealth that can be passed from one generation to the next.

Tokenization also opens up the global market, allowing for the democratization and globalization of local investments. With upcoming platforms, citizens in India and England can invest in property in Nigeria, or a taxi fleet in Singapore.

Best of all, it turns a traditionally illiquid asset, like real estate — one that requires months to cash out of — into one that can be bought, sold, and traded within minutes.

Using a distributed ledger paired with a regulated secondary exchange, deals can be recorded and immutably stored when ownership changes hands, in a way that’s transparent and viewable by anyone with an LTE or WiFi connection.

If this sounds futuristic, it’s worth noting that we’ve already seen examples of this in action: a property in Manhattan, for example, or this building in Miami, or perhaps this one in Wiesbaden, Germany.

You can expect these tokenized sales to increase in popularity as mainstream investors take notice. KPMG, for example, recently created a prospectus for potential investors interested in tokenized real estate as an investment vehicle in Hong Kong and Singapore. And while KPMG isn’t a firm known for catering to the average, small-scale investor, the fact that it’s interested in the potential of tokenization as an investment vehicle speaks volumes about its potential and opportunity for adoption.

Both today and in the future, tokenization will democratize investment opportunities while reducing the traditional barriers to entry faced by those looking to acquire assets and build wealth.

About the author

Dan Simerman is an investor and technical product manager well versed in consumer psychology, digital assets and open source software development. Dan has a history of building software for Fortune 50 financial institutions, multinational media companies and strategic consulting firms.

As Head Of Financial Relations at the IOTA Foundation, Dan's goal is to support technology for a new type of open infrastructure, one where people and devices can seamlessly exchange data freely, safely and securely in a digital world.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.