It may not be big news that the ability to tokenize assets like art, all kinds of collectables and, of course, real estate has been around for years. What IS big news is the myriad of applications and usages of tokenizing real estate that are blossoming. When you think of real estate the first thing that usually comes to mind is a piece of property or probably a house. Fractionalizing, or tokenizing them, is only one sector that has made the mainstream news. The next huge growth sector will be in the financing sector.
A quick refresher; a real estate token is a virtual asset used to represent ownership of land, apartments, homes, and various other real properties. Additionally; it’s not always easy to get into the real estate market. Buying houses, apartments, and condos requires substantial money, something not everyone has. Tokenizing allows a new and more affordable way to invest. So investing is just one sector application that is rapidly gaining acceptance.
Obviously there has been a HUGE and rapid change in the real estate market over the past year. Shortages of available houses have resulted in massive price appreciation for those available houses and a sharp increase in mortgage rates have caused an affordability problem for many buyers. Additionally, existing owners may have significant untapped equity in their property they may want to tap. Using tokenization in lieu of traditional financing could present some interesting and creative options, and in the process, unleash a whole new digital asset sector.
What if, rather then being able to just invest in fractional ownership of real estate, tokenization could be used to become a tool coupled with a traditional mortgage to help real estate and home buyers finance a purchase? Certainly the huge price spikes in home prices have priced many buyers out of the market. Even existing owners that may want to sell their homes to trade up to a new larger house may need additional financing. Shared equity tokenization may be the answer and a huge new potential financial category.
As an example, lets use a $1M home. A buyer would traditionally put down 20% ($200K) and get a mortgage for $800K. Oh, that was last year. Now that house is $1.5M (yeah, really) which would take a $300K (20%) down payment and a $1.2M mortgage. That could certainly price out a potential buyer. But what if that same potential buyer tokenized a 25% equity interest in that house? With 25% down ($375K) the interest rate on the $1.125M mortgage could potentially be lower, now making the house affordable. The equity investor participates in the upside potential of the home’s value and may even have liquidity for their token if it does become listed on a token exchange. These types of programs are actually currently available, and certainly represent an up and coming sector, for sure.
Another new little known program allows existing home owners that have significant equity in their newly appreciated home to tokenize that equity. Rather than take out a home equity loan and take on debt with monthly payments and high(?) interest rates, why not convert that to a tokenized equity share? Again these programs are just getting off the ground and some are even offering liquidity for these tokens.
Obviously these new sources of financing will challenge (disrupt) traditional financial products, or could certainly be used in conjunction with them, and the application are boundless. Think private home ownership, mixed use projects, apartments/condos and others. This may very well be the next HUGE digital asset sector. A true game changer.