NFTs, blockchain, and the metaverse have been all over the news since the summer. All of these searches are on the rise, and more people are looking for new applications for this not-so-new technology group. And, while we’ve spent a lot of time looking into how virtual real estate is shifting and shaking thanks to NFTs, we haven’t looked into what’s going on with NFTs and physical real estate as much.
In 2022, will non-performing loans (NFTs) be a thing in real estate and real estate investing? Yes, without a doubt, but perhaps not in the way you think.
NFTs are used to sell individual properties.
Because NFTs aren’t physical, they’re difficult to grasp, and many people writing about them don’t explain them well. An NFT can be thought of as a digital deed stored in a system designed to keep them extremely safe. An individual NFT, like a deed, refers to a single item, even if that item is part of a series or a whole. It does not, however, have to be a virtual thing; it can also be a real thing. You can make an NFT that gives the holder complete ownership of your grandmother’s wedding ring, or one that grants exclusive access to the dog park on Wednesdays from 1 to 3 p.m.
Believe it or not, when it comes to real estate, things can get a little shady. Real estate law hasn’t caught up to the new technology that allows NFTs to exist, so we still have physical deeds and recorder’s offices and all of that. A lot of people heard about a “sold as an NFT” apartment in Kyiv, Ukraine. It was… and it wasn’t, as evidenced by the quotes.
What actually happened was that a small corporation’s ownership was recorded as an NFT and then sold using that technology. The corporation just so happened to have one — and only one — asset. It was, indeed, that apartment. So, to get around the technicality that selling a whole piece of real estate using NFTs is currently not very viable, the corporation and its assets were sold using the NFT.
NFTs for fractional real estate sales
Now, I don’t think anyone will be able to buy a whole house with an NFT for quite some time. Real estate law is slow to change and takes a long time to implement. Tokenized ownership of real estate projects, on the other hand, is a thing that is happening now and then. It’s also absolutely fantastic.
Sure, you can buy shares in development companies or REITs, but buying individual project shares is often prohibitively expensive for most people, allowing only deep-pocketed, long-term investors to participate in projects with large margins. Actual fractional ownership, such as tenancy-in-common or joint tenancy, necessitates a lot of paperwork and time, and it has to be done all over again every time an owner swaps out.
But let’s pretend you could sell shares in a company that owns a specific property or project as NFTs. Each NFT marketplace development represents a percentage share of the property, based on the designation made at the time the NFT was created (a process known as “minting”). Your NFT in Real Estate Project Alpha, for example, entitles you to a 5% buy-in, along with all the benefits that come with it, as specified in your contract.
To complete your purchase, you simply keep the funds in a digital wallet (often in a stable cryptocurrency to make the process easier on the recording end), click the “buy” button, sign the paperwork digitally, and you’re an owner in minutes. Without having to go through the traditional closing process, your ownership of that NFT is recorded on the blockchain, and you and the other owners have a permanent record of your purchase.
In the event that you decide to sell your share, the same thing happens (under the rules stipulated in your contract). Everything is recorded to the same NFT (remember, it’s essentially a virtual deed), and you’re out of that investment in a few clicks. Regardless of the reason for divestment, this can provide people with faster, easier, and less expensive options.
How commercial real estate tokenization will change in the future
The concept of fractional real estate is not new. Since the introduction of Real Estate Investment Trusts, or REITs, in the 1960s, real estate investors have profited from this concept. This concept was developed to allow investors, particularly small investors, to invest in real estate funds and profit from them. Since its inception, fractional real estate has come a long way, and real estate tokenization has a promising future.
Investors and sellers can connect in a global market using blockchain technology, allowing them to complete real estate transactions with unprecedented speed and ease. Although tokenization can help raise capital from a wider range of people than a traditional real estate market, it still faces some challenges that it must overcome if it is to secure its place as a key investment vehicle in the future of real estate investing.
A secure blockchain system is built around smart contracts. These must go through rigorous security audits to ensure that any issues that arise during the development process do not compromise the integrity of the tokens. If a smart contract’s code is flawed, investors may be more vulnerable to hacking and have their tokens reissued.
The Securities and Exchange Commission, or SEC, requires that Real Estate Securitized Tokens be registered. The Securities and Exchange Commission is still catching up to the fast-paced world of real estate securities and tokenization.
Some real estate token issuers may choose not to register with the Securities and Exchange Commission. In such cases, these companies must apply for an exemption from the SEC’s registration requirements. Otherwise, they may face penalties that have an impact on investors.
For tax purposes, cryptocurrency and digital tokens can be considered capital assets. Taxation issues must be resolved for real estate tokenization to succeed in the future. The tax laws in the United States have yet to refine their policies on virtual currency taxation.
Legalities relating to taxation for digital tokens such as asset-backed tokens, real estate tokens, and security tokens are currently complicated and difficult. To encourage more investors to invest in real estate tokenization, taxation laws must include explicit provisions on these topics in order to make real estate transactions more frictionless.
Almost every industry, including real estate, has been affected by technological advancements. You can take advantage of this meta-trend and global shift by staying current with the latest information and maximizing the value and income potential of your investment portfolio. With the help of this guide, you can begin to arm yourself with the knowledge you’ll need to propel your investment portfolio into the digital age’s next frontier.