Perhaps you’ve heard about innovations such as cryptocurrency, bitcoin, and blockchain. Maybe you’ve even invested in them already. Blockchain, in particular, is one innovation that many real estate experts are closely 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 you could use it to your benefit. Let’s take a closer look at blockchain. Let’s see what it’s all about and why it’s been described as game-changing for Portland real estate investors.
Blockchain Defined
At its most fundamental level, a blockchain is a digitized ledger or shared database. What makes this special is that it is built on decentralized access– while other databases aren’t. This means that the data has copies in multiple computers and is accessible to all, but it cannot be altered. This is key. Because it cannot be changed, blockchain data is regarded as more trustworthy. Although often confused with bitcoin or cryptocurrency, blockchain is a secure system for recording and distributing digital information.
How It Works
The blockchain process is initiated when a transaction or record is requested. This request is sent out to nodes or computers connected to a network. Using algorithms, the request is processed by the nodes. After that, they get 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 the data can be deleted or altered.
Implications for Real Estate Investing
The most significant aspect of blockchain for real estate investors is the confidence and trust that is automatically built up when using this method. Using unalterable information, a buyer could show how much available funds they have, and both parties could trust that the information is legitimate. Conversely, the seller could also do the same to show that they own the property.
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 more convenient and your holdings more liquid. This could be carried out through the use of smart contracts and tokenization:
- Smart Contracts. Smart contracts are lines of code that are written in a blockchain. When certain terms and conditions are met, a transaction will automatically execute. 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, once the funds have been approved and released, a smart contract would trigger the automatic transfer of property ownership. This contract would be shared with all the participants. And each one could independently check the status of the process. Smart contracts could also be used for leasing Portland rental property, potentially removing the need for background checks, security deposits, and more.
- Tokenization. In real estate, you can view tokens as digital certificates that document ownership interest. Tokenization happens when the ownership of a property is shared by multiple people. For instance, when a property owner needs to raise funds, they may sell shares of their ownership to another person. Although similar to a real estate investment trust (REIT), tokenized real estate is more direct and flexible. This way, people can own an interest in a property without having to spend the full amount on it. Then, when the need arises, they can also easily sell their token for cash. This makes tokenization extremely more liquid than other types of real estate investments.
As shown, blockchain, smart contracts, and tokenization can likely alter the way that real estate is purchased, sold, and owned in the future. Not only would it be a way of keeping unalterable records of all transactions, thereby reducing fraud, but it could also speed up contracts and leases as well. Ultimately, we’re going to see a substantial decrease in the cost of investing and leasing rental property.
Still, it would take years before blockchain would be fully realized and implemented in the real estate industry. But smart investors should already be thinking about ways to use this developing technology in future investing activities.
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