You’ve probably heard about or maybe even jumped on board with innovations such as cryptocurrency, bitcoin, and blockchain. Blockchain, in particular, is one innovation that many real estate experts are watching due to its potential to revolutionize the way real estate transactions are carried out.
While the majority of that potential is currently theoretical, forward-thinking investors should learn about blockchain’s affordances and start thinking about how it can benefit you. Let’s look at what blockchain is and why people are saying that it’s a game-changer for Eatontown real estate investors.
Blockchain Defined
At its most basic level, a blockchain is simply a digitized ledger or shared database. What makes this different from other databases is that this is built on decentralized access. This means the data is spread throughout various computers and can be accessed by all, but they are unalterable. This feature is key. Because it cannot be changed, people regard blockchain data to be very secure. Although often confused with bitcoin or cryptocurrency, blockchain is a secure system for recording and distributing digital information.
How It Works
The blockchain process begins when there is a request for a transaction or record. This request is sent out to nodes or computers connected to a network. Using algorithms, the request is processed by the nodes and then is immediately verified. Once this happens, the ledger is updated with a new block of data added to the blockchain and closed. Once closed, there is no way anyone can delete or alter the data.
Implications for Real Estate Investing
The best benefit that blockchain gives for real estate investors is that it reduces the need for trust between a buyer and a seller. Using unalterable information, a buyer could easily show reliable proof of how much available funds they have. In the same way, the seller could also use the same technology to show proof of their property ownership.
Without the need for additional verification, blockchain holds the potential to eliminate some of the most time-consuming and expensive parts of buying properties, from the title company to your real estate attorney. It could also make investing in real estate simpler and your holdings more liquid. This could be realized through the use of smart contracts and tokenization:
- Smart Contracts. Smart contracts are lines of code that are kept on a blockchain. When the terms and conditions agreed upon are met, they automatically execute a transaction. For example, if your financial profile was stored on a blockchain, your mortgage lender could have immediate access to everything they needed to make a decision about your loan application. Then, a smart contract could be made that would automatically transfer ownership of the property once the funds are released. This contract would be available to all the authorized people involved, and they could check the status whenever they like. Smart contracts could also be used for leasing Eatontown rental property, potentially doing away with the need for background checks, security deposits, and more.
- Tokenization. In real estate, you could describe tokens as digital certificates that show ownership interest. Tokenization happens when there is a division of ownership interest. For example, when a property owner raises funds by offering shares in their property ownership. Although similar to a real estate investment trust (REIT), tokenized real estate is more direct and flexible. This way, people can buy an interest in a property for a lesser amount than buying the entire property. It would also be easier for them to sell their token for cash. This makes tokenization extensively more liquid than other types of real estate investments.
For these reasons, blockchain, smart contracts, and tokenization could possibly change the way real estate is bought, sold, and owned in the future. Not only would it be a way of storing unalterable records of all transactions, but it would speed up contracts and leases as well. Blockchain could also help reduce fraud. The bottom line is that it would lower the cost of investing in and leasing rental property.
Still, blockchain wouldn’t be used to its full potential anytime soon. It would be a few years from now before we see the industry start to implement it. But smart investors should learn more about this developing technology and plan ways to use it in future investing activities.
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