By Zain Jaffer. Originally published at ValueWalk.
The advent of Web 3.0–a new era of the Internet which uses blockchain technology to transform how information is stored, shared, and owned–is one of the most exciting technological prospects of our time. Where some skeptics believe that a less centralized internet poses a threat to privacy and even security, those of us who welcome the Web3 era believe that it will make for a truly democratic web that counteracts the problem of identity theft with encrypted wallets, allows freedom of speech for everybody, and gives its users a voice on their favorite networks.
Regardless of where one stands on Web3, its relevance to the real estate market can be a difficult thing to wrap one’s head around. While the connection between something as intangible as bitcoin and as solid as a home might not seem clear at first, Web3 is poised to have profound impacts on the way we purchase and invest in real estate. Below are five of the major opportunities that Web3 offers the forward-thinking real estate investor.
NFTs Lead The Way
Owning real estate is more popular than ever in the U.S., with demand outpacing supply in many markets. Web3 allows for an even broader range of investors to enter the market–for example, those who lack the capital necessary to make a down payment and those who don’t have the time to wait around for a mortgage or the completion of a liquidation process–to make these transactions, using unique digital tiles called non-fungible tokens (NFTs).
Best-known for their use in the acquisition of digital music and art, NFTs have since developed into profoundly multifaceted tools. According to ButterflyMX, $690 million worth of real estate was tokenized in 2020, a number that skyrocketed to $14.3 billion in 2021.
Proprietary technology that includes a legal framework and allows NFTs to stand in for property ownership has also been developed, enabling purchase records to be lodged on blockchain along with legal documents. These systems make use of triple-ledger accounting, which registers a property’s buyer and seller while securing signatures from both parties.
This is an extraordinarily simple and effective system for proving ownership.
What was once an arduous task that could take weeks can now be completed almost instantaneously. In the process, it cuts costs and allows buyers to purchase property more quickly than ever.
DeFi Subverts The Norm
Decentralized finance (DeFi) avoids the bureaucratic processes of traditional banks and makes investing less clunky by means of linked smart contracts, oracles and blockchains. Automated workflows oversee its financial decisions, rather than individuals; a smart contract monitors the money coming in, the money going out, and adjusts to changes in the marketplace. Mortgages can be facilitated quickly and painlessly.
Where the ownership of properties is shared, NFTs can be used to obtain mortgages from lending platforms. However, investors will need to stay well-informed when it comes to regulations, which may change over time as this form of investment becomes more popular. They should also hire a legal expert who has expertise in blockchain technology to assist them in such transactions.
Younger generations of potential buyers, who’ve grown up online and use the web as their go-to marketplace, will likely find purchasing real estate online using DeFi, cryptocurrency, or fiat currency perfectly intuitive. This group also represents a new, powerful brand of investor overall, prepared to take big risks in expectation of even bigger rewards. DeFi’s ability to facilitate nimble, transparent transactions will help them make their mark in this space.
Real Estate Investing For Everyone
Reliance on DeFi may make some people nervous, but intrepid realtors recognize the potential of this system’s efficiency and transparency. Turning real estate into tokens allows investors to use concrete assets to create readily liquefiable portfolios on blockchain. It also opens up the world of real estate investment to less wealthy individuals. This is because tokenizing assets–in this case, property–makes fractional investing possible. As 101 Blockchains put it, fractional ownership tokenization is like a “crowdfunding platform for real estate,” and as of early 2022, was less fraught with regulatory issues than Entire Asset (EA) tokenization.
An individual who might never be able to afford to buy an investment property apartment for $250,000, for example, might be able to afford a fraction of that amount, entitling him or her to a fraction of its ownership, which he or she could trade for an equivalent fraction of another property at any time. One AI platform allows multiple investors to purchase a fraction of turnkey rental properties for as little as $50 apiece.
This expedited process also enables homeowners to use NFTs to sell portions of their own home equity to others, so buyers can invest in that property’s potential for appreciation.
Believe In Bitcoin
The controversy surrounding bitcoin and other cryptocurrencies makes some wary of using them. However, those who see their potential are finding innovative ways to leverage cryptocurrencies to transform their financial operations. United Wholesale Mortgage, for example, recently launched a pilot program where it will allow crypto to be used by its customers, starting with bitcoin but potentially including Ethereum.
Bitcoin-based 30-year crypto mortgages are also now in the works. Some fintech companies are addressing the issue of price volatility with an interest rate based on a ratio of cryptocurrency value to loan amount, with a margin call issued if the ratio hits below a certain percentage, such as 65%. If it drops to 30%, the assets are liquidated and their value stored in USD.
It’s also crucial to note that transactions involving cryptocurrencies need not be fully cryptocurrency-based. While some transactions can be done entirely using cryptocurrency, investors and sellers alike may want to use or receive cash for part of the payment. It’s important to be aware that government agencies and third parties involved in any given deal may require cash payments for their services.
A Marketplace Of Equals
As soon as NFTs became capable of representing real estate properties, it was inevitable that a booming marketplace for NFT-based transactions would spring up, allowing those who already own property to sell a portion of it to free up funds, possibly to invest elsewhere. This marketplace provides all the necessary paperwork to create an NFT for a property.
Likewise, those who choose to invest can profit in a fractionalized way from the appreciation realized by the properties they purchase. This is a new model for building a real estate portfolio, available to people at a wide range of income levels. So, bring on Web3: savvy real estate investors are ready and willing to explore this vibrant, modern way of doing business.
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