Why Fractionalization Is The Future Of Real Estate

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The state of the housing market has been at the forefront of many investors’ minds as of late. While the past few years have been characterized by a general housing boom, this trend is showing signs of slowing down, amidst ongoing supply chain issues and the war in Ukraine.

While some have expressed fears that we are entering a situation similar to the crash of 2008, most commentators agree that we will likely see a slowdown rather than a crash.

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As a result, there is still plenty of money to be made in real estate, especially as inflation begins to slow and mortgage rates drop with it. However, many potential investors have been shying away from breaking into the market due to the high upfront costs of entry.

This is one of many reasons why investment fractionalization is set to take the real estate market by storm. This revolutionary blockchain-based technology has been around for a few years, but its popularity is likely to grow massively in the next couple of years.

What Exactly Is Investment Fractionalization?

While most people are familiar with how NFTs have taken the art world by storm, fewer understand their relationship to the real estate market. Indeed, NFTs’ digital nature makes it hard for some to see how they can be related to something as tangible as real estate.

However, the blockchain technology underlying NFTs has a multitude of applications that are set to revolutionize nearly every industry.

Blockchain creates transparent and inalterable records of ownership over assets, providing an unprecedented level of security and fraud prevention. By turning an asset, such as a piece of digital artwork, into an NFT, creators are able to protect themselves from fraud while buyers are able to definitively prove their sole ownership over a unique and authentic asset.

When it comes to NFTs, artwork is just the beginning. Tokenizing a real estate property allows buyers to easily and securely purchase properties and prove their ownership without having to jump through the usual bureaucratic hoops.

What’s more, once a property has been tokenized, it can be opened up to fractional ownership, allowing multiple investors to purchase smaller “pieces” of the property and collectively share in the profits.

Fractionalization Is Big Business

This process opens up a world of opportunity for investors of all kinds, and promises to revitalize the real estate market as a whole. Real estate is one of the most universally desirable asset classes, but the high up-front costs are prohibitive for many smaller investors.

This creates a situation in which the most lucrative properties end up owned by groups of already established  institutional investors. Thanks to fractional ownership, however, a much greater percentage of the population can afford to get in on this market and begin making passive income without having to amass, and potentially risk, a large amount of capital.

In addition to providing a source of passive income, fractional ownership comes with a variety of other benefits as well. Whereas sole owners have to take responsibility for maintaining the property, whether personally or by hiring a property manager or managers, fractional ownership allows them to split these responsibilities among their fellow owners.

This lowers the barriers to entry even further by minimizing the burdens that come with traditional forms of ownership.

Moreover, the advent of blockchain-based smart contracts promises to vastly increase both the efficiency and the profitability of real estate transactions. These contracts are created and stored securely on the blockchain, and are coded to execute a particular function (e.g., transferring ownership of a property) as soon as specified criteria are met (e.g., a certain amount of money is paid).

Smart contracts therefore eliminate the need for third-party verification, saving time and money while leveraging the blockchain’s signature immutability and transparency to ensure maximum security.

Hands-On Education

This more democratized form of property ownership represents a unique opportunity for Millennials and Gen Zers to get their feet in the door and develop essential skills and knowledge while also earning steady passive income.

The process of purchasing and managing a property can be intimidatingly complex, and fractionalized investing gives members of these generations a chance to gain hands-on experience that will have wide-ranging benefits, whether they are yet to buy their first home or are looking to expand their portfolio to include multiple properties.

These benefits are not exclusive to younger generations. The practical education made possible by the tokenization and fractionalization of real estate will have wide-ranging benefits for people who, for any number of reasons, have not been able to participate in this lucrative market in the past.

Decreasing the barriers to participating in the real estate market is a massive step towards increasing investment activity across the board, which is critical to establishing a genuinely vibrant economy.

The New Reality Of Real Estate

While recent events have made many who would already be reluctant to enter the real estate market even more hesitant, there is good reason to believe that this trend is not likely to continue.

Tokenization and fractionalization help break down the major barriers preventing most of the population from getting in on this coveted asset class, presenting a major opportunity for all parties involved.

As more people take on fractional ownership of properties, we can expect to see a general boom in public literacy about the field, which is essential to ensuring its continued vibrancy as an asset class.

By making the space more democratic and diversifying the ownership of properties, it will also help create more checks and balances that will ensure the best experience for owners and tenants alike.

As blockchain and NFTs continue to shape and be shaped by nearly every industry it touches, we can expect lucrative investment properties, rather than cartoon apes, to become the new face of the technology.