10 Ways Blockchain is Impacting Real Estate Investing
10 Ways Blockchain is Impacting Real Estate Investing
Real estate is a finite commodity with both intrinsic and emotional value. It’s something that people need for shelter, business, entertainment, and recreation. And regardless of what the markets do in the short-term, it’s always going to be a wise long-term buy.
But the real estate investing game as we know it is on the brink of undergoing some significant and sizeable changes. Most notably, blockchain technology is revolutionizing how the industry works from the inside out.
The Pain Points of Traditional Real Estate Investing
Real estate investing experienced a major shakeup right around the beginning of the 21st century as the internet came into the picture and digitized formerly manual/paper processes. And while many technologies have come and gone over the last 15 or 20 years, it’s remained relatively unchanged from a 30,000-foot perspective. Over this time, some frustrating and cumbersome pain points have emerged and/or been exacerbated. The biggest ones include:
- Exclusivity. Practically speaking, real estate investing is only available to wealthy individuals. While unique financing options make it to where members of the middle class can get some skin in the game, the barriers to entry are costly and high for those who don’t have the necessary cash or connections.
- High fees. The sale price of a piece of investment property is just the beginning. Between attorney fees, taxes, transfer fees, exchange fees, and other closing costs and transaction expenses, investors often end up paying far more for an investment property than they originally anticipated. This stifles ROI and puts investors at a disadvantage from the very beginning.
- Illiquid. Stocks can be bought and sold in a matter of seconds. Bonds, mutual funds, precious metals, and other physical assets can also be cashed in relatively quickly and unceremoniously. The same cannot be said for real estate, which is a highly illiquid investment. Not only do you have to find a buyer – which can take days, weeks, or months – but then third parties get involved. This leads to weeks or months of due diligence. (And even then, it’s possible that the deal falls apart).
- Slow transaction speeds. Real estate investing moves at a snail’s pace. It’s a slow, deliberate, drawn-out process with lots of layers, complexities, and back-and-forth negotiations. Getting a deal over the finish line can easily take six months to a year (and that’s for simple investments). A lot can change over that time!
A Primer on Blockchain
Enter blockchain: The most disruptive technology to alter the real estate industry since the advent of the internet.
While originally developed as a method for securely recording and managing cryptocurrency transactions, blockchain and cryptocurrencies like Bitcoin are totally separate concepts. Blockchain has hundreds of potential uses, the majority of which have nothing to do with virtual currency. Real estate is one example.
But before we dig into the 10 ways blockchain is changing real estate investing, let’s make sure we’re all clear on precisely what blockchain is.
In the simplest terms, blockchain is a decentralized public digital ledger that’s used to record transactions in real-time across multiple computers in order that the record cannot be retroactively altered without altering other blocks and the entirety of the network.
If you’re a visual processor, you may want to think about it like this:
- One party requests a transaction.
- The transaction is then broadcast out to a peer-to-peer network that consists of nodes.
- The transaction is then verified by the other party.
- After the transaction is verified, it’s combined with other transactions to create a new “block” of data, which is added to the ledger.
- This new block is added to the existing blockchain, effectively attaching itself to other blocks. This makes it to where the transaction cannot be altered without impacting all of the other blocks it’s attached to. (In other words, it’s not happening.)
- The transaction is complete.
Blockchain is a highly sophisticated and complex technology that simplifies and secures a variety of transactions – real estate being one of them. And though it’s hard for most to see right now, these changes are coming faster than we realize.
How Blockchain Changes Real Estate Investing
Now that we’re all on the same page regarding the challenges that currently exist in the real estate investing space and how blockchain functions as a technology, let’s carefully explore some of the specific ways in which the latter is helping to smooth over the former.
- Tokenization
Historically speaking, those who are already wealthy have the best chance of acquiring lucrative real estate assets and obtaining even more wealth. It’s one of those situations where you need money to make money.
Blockchain has the potential to be a great equalizer.
Blockchain is able to tokenize the ownership of assets – real estate or otherwise – which ultimately democratizes ownership and makes it to where anyone with any amount of money can get some skin in the game.
As the name suggests, tokenization essentially splits real estate assets up into tokens that can then be stored on the blockchain. The owner of the asset can then sell individual tokens on the open market through secondary trading methods. Thus it becomes possible for people to buy “shares” in larger real estate investments that they wouldn’t be able to obtain on their own.
- Increased Liquidity
Guess what else tokenization does? It makes real estate investments much more liquid. Instead of waiting months and years to sell a property and complete a transaction, investors can exchange some or all of the property for immediate cash. This frees up money to invest in other properties (or accomplish any other personal or professional goal).
- Fewer Intermediaries
The real estate transaction process is long and arduous. And it’s made even more difficult by the involvement of lawyers, brokers, banks, appraisers, and a host of other third parties who insert themselves into the situation.
The good news is that blockchain has the ability to gradually automate systems, dis-intermediate humans and streamline the process without compromising the security or integrity of the deal. This will lead to more investors working with companies like Estate Investing, LLC, which put investors in direct contact with motivated sellers.
- Error-Free Land Titles
Did you know that as many as 25 percent of all title reports contain errors?
Land registration is often managed in an offline capacity by overworked and understaffed departments. This commonly leads to errors, fraud, and misinformation. (Which is why the $ 15 billion title insurance industry exists.)
With blockchain, all title documentation can be moved to a secure ledger. This will reduce the need to run complex title searches and will eliminate fraud altogether. The result is error-free land titles that are less expensive and more reliable.
- Smart Contracts
Smart contracts are automated contracts that self-execute with very specific instructions that are written in code and stored in the blockchain. They’re written in a “solidity” programming language, which uses “if-this-then-that” language. This has the ability to automate rent payments and all other financial aspects of real estate relationships.
- Smoother Investor-Tenant Relationships
In terms of rental real estate, one of the biggest perks of smart contracts is that it’s virtually impossible for a tenant to avoid paying rent. And if they do so, it can only mean one thing: They don’t have the money. This creates less frustration between investors/landlords and tenants. Either rent is paid, or it’s not. And if it’s not, the eviction process can begin.
- Lower Costs
When intermediaries are cut out and contractual processes are streamlined, this results in lower costs for both buyers and sellers of investment real estate. Some or all of the following may be eliminated or reduced in the very near future: loan fees, inspection costs, registration fees, transfer fees, taxes, commissions, and underwriting costs.
- More Opportunity
We’re all looking for new opportunities. Blockchain has the potential to remove so many of the barriers to entry that keeps middle-class individuals out of the investing game. This could be one of the major driving factors in narrowing the harrowing wealth inequality gap in this country (so long as the right informational processes and resources are put in place to educate new investors).
- New Classes of Investments
With tokenization, fractional ownership, and smart contracts, it’s possible that entirely new classes of real estate investments will emerge. From homeowners selling garage space to mobile home park investors helping tenants become property owners, there’s potential for a serious shakeup in this sleepy space.
- Less Friction
When it’s all said and done, blockchain eliminates so much of the friction that investors experience in their day-to-day interactions. And when friction is reduced, there’s more time to add value, make new investments, and infuse additional capital into the economy. This benefits everyone.
Blockchain Changes the Game
Real estate will always have a high degree of human involvement and emotion. But any time processes can be streamlined and more opportunities can be created, there are positives to be gained. This is a big year for blockchain, so let’s keep an eye on the technology and continue to study how it impacts real estate investing moving forward.
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