Investing in NFT Real Estate
Non-fungible tokens (NFTs) seem to be on the news almost every day. From record breaking prices for NFT art to NFTs used as a marketing tool for popular fast food chains, the trend seems to be taking off. As a gimmick or collectible (sometimes both), NFTs are easy to implement and run, but much more challenging to apply to slow changing industries like real estate.
In the past year, experimental applications of NFTs have emerged in industry. From construction projects to lending, various companies are testing everything as NFTs to improve processes and speed up real estate transactions that can often be complicated by the many levels of document review.
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NFTs in the real estate industry
NFTs are nothing more than unique digital titles (tokens) for real or virtual property that are stored in a blockchain ledger. In theory, this reduces the risk of damage from fraud and improves an owner’s ability to demonstrate that they actually own something. But when it comes to real estate, it’s much more complex.
There are two types of tokenization in real estate: total assets (EA) and partial ownership (FO). FO tokenization is pretty straightforward. It is similar to a crowdfunding platform or other similar structure that allows investors to buy stocks. Each shareholder holds a number of tokens that represent shares in the project, depending on how the investment is structured. FO tokenization is already being used in limited cases in the real estate industry.
EA tokenization, on the other hand, cannot work unless the actual title deed is converted into an NFT. This is still incredibly difficult to do because of the regulatory environment surrounding real estate investing, although steps continue to be taken to move the ball down. Ultimately, a new asset class must be created in order for an EA token for a real estate deed to exist.
FO tokenization is much easier because companies that own real estate assets are easily tokenized and distributed through NFT tokens, which are a type of security such as a stock share. And like a stock share, NFT tokens are supposed to be registered with the SEC.
Digital real estate vs. physical real estate
Although it is still difficult to register individual physical homes as NFTs, digital real estate can be registered with NFTs. Digital real estate doesn’t have any real regulatory rules as it exists in a virtual world that is the financially regulated equivalent of the Wild West.
Digital real estate exists in virtual spaces, often referred to as “metaverse” or “sandbox platforms”, where users can interact with and build whatever they want with almost anything. Minecraft, for example, is a well-known platform that offers digital real estate potential. Other popular platforms are Roblox (NYSE: RBLX), Decentralized country (CRYPTO: MANA), Axie infinity (CRYPTO: AXS), Upland, Cryptovoxels and Somnium Space.
Just like real real estate, virtual plots are referred to as parcels within the space allotted for the platform. Depending on the platform, there is a limit to the number of parcels available, and that leads to scarcity, just as there is only so much land in the physical world. For example, Decentraland has 90,601 individual lots, each trading as a type of NFT called LAND, and they are bought using a cryptocurrency called MANA.
How do real estate NFTs work?
Real estate NFTs work like any other NFT. They are bought with a cryptocurrency of the seller’s choice, kept in a digital wallet and, if speculative, sold again at a profit to a buyer with the correct amount of money.
Investments held as FO tokens behave more like stocks as they represent a portion of a real estate project rather than a single real or virtual item. Profits are paid out like any other type of stock-based investment, as ownership is only a portion of a company. For example, if you own one in 10 tokens from a real estate company that invests in apartment buildings, at the end of an earnings cycle you will receive a check that represents 10% of net income (unless you have made a different arrangement) on the spot).
As with all NFTs and stocks, you have the right to divisibility, which means you can usually sell these tokens at any time. Some real estate investment crowdfunding platforms require you to hold your stocks for a period of time, and NFT-backed platforms will likely have a minimum holding time as well as they become more popular.
Use of NFTs in Mortgages
NFTs aren’t actually used in mortgage products, but they may become increasingly popular. LoanSnap launched the first NFT home loan mortgages with its Bacon Protocol. You process loans like regular mortgages, but issue NFTs instead of simply creating mortgage letters with the liens.
Only a handful of NFT mortgages have been minted to date and are not yet available for mortgage or crypto investors to consider for their portfolios. However, LoanSnap plans to issue a stablecoin called bHome, which is a fraction of the ownership of one of the NFT mortgage loans. Investors will also enable additional NFT mortgages by providing financing for future borrowers.
Pros and Cons of Real Estate NFTs
With real estate NFTs being so new, it’s difficult to really gauge their strengths and weaknesses. There are many experiments going on right now that will help investors better understand where NFTs can and cannot be used in the real estate industry.
However, we do know a lot. First, real estate NFTs, like all other NFTs, promise easy-to-understand and secure proof of ownership for a wide variety of real estate investments. Second, they allow real estate to be bought and sold in virtual worlds that turn out to be the investment frontier.
On the other hand, like anything in the crypto world in general, real estate NFTs are not guaranteed and their value can drop to zero without warning. Real estate NFTs related to virtual real estate will be particularly risky investments for some time. NFTs, which are partial ownership of real investments, should be more stable.
The future of real estate NFTs
Currently, the connection between real estate and NFTs is at such an early stage that it is difficult to predict. NFTs can, in theory, offer simple ways to transfer ownership of real estate investments or virtual properties – but don’t expect them to be transferring entire properties anytime soon. The few whole units that were sold with NFTs were sold as part of a package. For example, a home sold in Ukraine was included in the sale of a business that was the actual NFT.
Current real estate laws make it very difficult to hold entire properties as NFTs. As blockchain technology and other tools in the crypto toolbox prove increasingly useful, for example, to create mortgages and generate crowdfunding opportunities, it is likely that they will change. Until then, look for ways to hold shares of mortgage debt, construction projects, and other corporate investments as NFTs.