In our last blog post about tokenization, we’ve taken a deeper look into the advantages of tokenization for real estate and into what there is to gain by tokenizing real estate. We concluded that this is a much-needed new way of doing business in one of the oldest businesses in the world, bringing greater flexibility, affordability and earnings to both real estate developers and investors. Today, we will look into how to tokenize real estate, offering you a glimpse into how we do it here at MetaWealth.

As you know, MetaWealth is an investment platform for fractionalized real estate assets. We allow our users to invest in real estate by tokenizing real-world real estate assets, meaning that we represent these assets on the blockchain, fractionalize them and offer individual shares as tokens. This allows anyone to own a little piece of the building without having to pay for the entire apartment or complex. The rental income collected from the apartments (by our own asset managers, so that users don’t need to do anything) is then distributed to the investors based on the contribution of each. 

Tokenizing real estate is a tremendously revolutionary step in taking real estate to the 21st century, and we are extremely proud to be at the forefront of this change world-wide. 

A. How to tokenize real estate: Why should real estate be tokenized?

Before we dive into how to tokenize real estate, let’s take a look at the why of the matter. Why is tokenizing real estate such an attractive idea and what are the advantages of doing it, at a glance? 

To recap the points made in our more recent blog post on the topic, this new way of doing real estate transactions saves money, time, and brings about more trust and transparency. 

Here’s why tokenized real estate transactions are better:

#1. Vetting an asset takes months of research, preparing, verifying and filing paperwork before you can invest in it. 

#2. The back-and-forth of making an offer, negotiating and buying or selling takes a lot of time as well.

#3. Lower fees: Paying such a large amount of money through traditional financial institutions (like classic banks) is more expensive. With blockchain payments, you save a lot of money on transaction commissions. 

#4. Even more affordability: it’s not just the transaction fees that are cheaper with blockchain. The price of the real estate asset you want to buy can be much lower as well thanks to fractionalization. In other words, exactly what we are offering here at MetaWealth, and why the world is now so interested in how to tokenize real estate. 

Can’t afford to buy an entire apartment to rent it? No worries, you can just buy a fraction of it and earn rent accordingly. 

#5. Lower disparities between multiple parties handling each stage of the process. 

Investing in real estate as an individual investor involves several stages, such as the property search, offer, contract negotiation, due diligence, financing, and closing. Because each of these steps is often handled by different parties, this can lead to even more lagging, time waste and paperwork back and forth.

#6. Higher transparency and trust.

The multiple parties handling the different aspects and stages of the real estate transaction process can also lead to a lack of transparency and therefore trust. Blockchain environments, on the other hand, are completely transparent by default, thanks to their built-in transparency practices, leading to a more trustworthy and safe transaction. 

B. How to tokenize real estate? There are 6 main steps.

Let's take a closer look at each of these steps:

Asset choice and vetting

This is actually the most important step of the process, and the success of your final result will depend on how well you select the right real estate asset to tokenize. It’s no use learning how to tokenize real estate if the asset you tokenize will turn out to be a bad investment. 

For our part, we carefully work with a team of experienced real estate developers and investors, as well as brokers, legal counsel and third-party vettors (Colliers International) to make sure the real estate assets we tokenize and offer on the MetaWealth platform are the best in their class.

Real estate asset valuation

Real estate tokenization requires an accurate valuation of the property. This valuation can be a challenging task, especially for properties that are unique or located in markets with limited transaction data. Valuation methods such as the cost approach, income approach, and market approach may be used to determine the value of the property accurately.

Asset Identification

The first step in tokenization is to identify the asset that is being tokenized. This could be anything from a piece of real estate to a painting or a stock, but for the purposes of this blog post we will focus on real estate, of course. The asset needs to be identified and verified as a legitimate asset that can be tokenized.

Ownership Verification

Once the asset is identified, the next step is to verify ownership. This involves ensuring that the person or entity claiming ownership of the asset has the legal right to do so. This may involve checking deeds, titles, or other legal documents to confirm ownership. If you’re looking into how to tokenize real estate for an asset you already own, this is the starting point for it.

Token Creation

Once the ownership of the real estate asset is verified, the next step is to create a digital representation of the asset on a blockchain network. This is actually the crucial step in tokenizing real estate, and it’s accomplished by creating a smart contract that defines the parameters of the token, such as its value, ownership rights, and transferability. 

The smart contract is a self-executing program that runs on the blockchain network and can be customized to meet the needs of the asset being tokenized.

Issuance

Once the smart contract is created, the next step is to issue the tokens for the real estate asset that was on-boarded on the blockchain. This involves assigning a unique digital identifier to each token and recording it on the blockchain network. 

The tokens pertaining to the real estate asset can then be transferred between parties, just like any other digital asset, with ownership and transaction data stored transparently and securely on the blockchain network.

‍

Now that we’ve established the outline of how to tokenize real estate, let’s take a look at the more technical considerations involved in the process.

‍

C. How to tokenize real estate: Technical Aspects

When tokenizing real estate, there are several technical considerations that need to be taken into account to ensure a successful and compliant process. 

Here are some of the key technical considerations everyone must consider when tokenizing real estate:

Blockchain Network Selection

The first technical consideration when tokenizing real estate is selecting the appropriate blockchain network. Different blockchain networks have different characteristics, such as scalability, security, and transaction speed, which can impact the tokenization process. 

The blockchain network selected should be able to handle the expected transaction volume, ensure data privacy, and provide adequate security measures to protect the digital assets being tokenized.

Theoretically, all blockchain networks are interconnected so in the broader scheme of things your tokenized real estate assets will still be accessible and ‘exist online’ securely no matter what blockchain network you choose. But the transaction speed of trading tokenized real estate can be impacted by your choice, which is why you need to consider this carefully if you’re interested in how to tokenize real estate yourself.

Review Token Standards

Tokenization of real estate requires the use of token standards that ensure compatibility and interoperability with different blockchain networks. The most common token standards used in real estate tokenization are ERC-20 and ERC-721. 

ERC-20 tokens are fungible and represent a share in the property, while ERC-721 tokens are non-fungible and represent a unique asset such as a building or a piece of land, making this type of token standard perfect for when you’re looking into how to tokenize real estate.

Smart Contract Development

The next technical consideration is developing the smart contract that defines the parameters of the token. The smart contract is a self-executing program that runs on the blockchain network and defines the ownership rights, value, and transferability of the digital tokens. 

It's essential to ensure that the smart contract is properly coded, audited, and tested to ensure that it operates as intended and complies with applicable regulations.

Real Estate Asset Valuation

When tokenizing real estate, it's critical to accurately value the underlying asset to determine the value of the digital tokens being issued. Real estate valuation can be complex and may involve multiple factors, such as location, market demand, and physical condition. It's essential to ensure that the asset is properly appraised and that the valuation process is transparent and auditable.

Real Estate Asset Digitization

To tokenize real estate, it's necessary to create a digital representation of the underlying asset. This can involve creating digital copies of legal documents, such as deeds and titles, and recording them on the blockchain network. The digitization process must be accurate and ensure that the digital asset is unique and cannot be duplicated or tampered with.

Compliance with Local and International Regulations

When looking into how to tokenize real estate, make sure you do your due diligence about complying with applicable regulations, such as securities laws, anti-money laundering (AML) regulations, and know-your-customer (KYC) requirements. 

It's essential to ensure that the tokenization process complies with these regulations and that appropriate due diligence is conducted on investors and other parties involved in the transaction.

Custody and Security of the Real Estate Asset

Finally, when you’re looking into how to tokenize real estate, it's essential to ensure that the digital assets are stored securely and that proper custody arrangements are in place. 

This may involve using a third-party custodian to hold the digital assets or implementing multi-signature security measures to prevent unauthorized access, speculation attempts or theft. 

It's therefore critical to ensure that appropriate security measures are in place to protect the digital assets and that custody arrangements comply with applicable regulations.

Due Diligence on Liquidity, Trading and Taxes

Real estate tokenization may have tax implications, depending on the jurisdiction where the property is located. Tax laws may apply to the token issuer, the property owner, and the token holders. It is important to seek legal and tax advice to understand the tax implications of tokenization.

How to tokenize real estate recap:

To sum things up, tokenizing real estate can make everyone’s lives easier, but it requires careful consideration and planning of several steps to make sure you select the right real estate asset to begin with and you then proceed with the paperwork to identify the asset on the blockchain, to verify its ownership, and then finally create and issue the tokens pertaining to it.

Then there are also the technical factors involved in tokenizing real estate, including selecting the appropriate blockchain network, developing a secure and compliant smart contract, accurately valuing the underlying asset, digitizing the asset, complying with applicable regulations, and ensuring secure custody and storage of the digital assets. By taking these technical considerations into account, real estate tokenization can be successfully achieved.

We hope you enjoyed our guide on how to tokenize real estate and if you have any questions or concerns, feel free to drop us a line. We’re always happy to hear feedback or take questions from our audience. 

‍