Utilizing NFTs in Real Estate Financing: Collateralization and Investment Opportunities

Blockchain technology has made revolutionary changes to many industries such as financial services and real estate. Decentralized Finance or DeFi provides all financial services on a blockchain network. In other words, Defi is a peer to peer financial service on the blockchain, so no intermediaries like banks and financial institutes are needed. DeFi and real estate NFT when become together can change the landscape of investment in the real estate sector significantly.

Nowadays, the global financial system is witnessing an emerging phenomenon that is going to shift the landscape of the traditional financial system. 

Financing, as one of the most lucrative and in demand industries are going on-chain and real estate NFTs and DeFi are playing an important role in such transformation. 

We, here in this article, will take you through the ways that real estate NFTs can be utilized in on-chain financing.

What is Real Estate NFT

In the digital era that we are living in, every asset, physical or digital, can be tokenized in the blockchain network. In other words, blockchain makes us able to convert a barrel of oil, a piece of diamond, an artwork or even a property to one or multiple NFT. Real estate NFT refers to a real estate property that is converted to multiple tokens across a blockchain network. By doing so, many small-scale investors become able to invest in the real estate market, so the sector’s liquidity enhances. Furthermore, smart contracts take care of all terms and conditions, ownership authentication and transfer, money exchange, etc. with no human interference. Hence, banks, brokers and attorney’s fees and charges will be eliminated and make it more cost-efficient. Blockchain network is immutable, so data cannot be changed or replicated. That is why investing in real estate NFT is reasonably safe and secure. 

How to Utilize NFT in Real Estate Finance

1- Property NFT as Collateral

Collateral is the key when it comes to finance. It goes without saying that when you lend money, you need a guarantee for it to be paid back. In other words, finance doesn’t proceed without an appropriate collateral in the lender’s hand. Usually, a tangible asset, in most cases a property is pledged by the borrower to the lender. In case of default, the lender can seize the collateral in order to take their money back. The same thing exists in DeFi, as money lending needs collateral, either in the real world or across the blockchain. Real estate NFT represents a fraction of a real estate property, so they can be utilized as collateral. All types of asset-backed NFTs can be utilized as collateral. However the real estate NFTs are more popular, as they are backed by a property in the real world.

2- Real Estate NFT as an Investment Opportunity

Real estate has always been a popular sector for investors all around the world. However, there are some difficulties that investors encounter when deciding to invest in the real estate sector. The first and most important one is illiquidity, as the real estate sector is considered as an illiquid sector to invest in. Next one is the high prices for valuable properties. Not many investors have access to enough financial resources to afford buying a whole property. Real estate NFT in the blockchain era  has resolved these main problems by making fractional ownership possible. Small-scale investors are now able to invest in a fraction of a property by buying one or multiple property-backed NFT. Once purchased, the investor is the fractional owner of the property that the NFT represents. On top of that, they are entitled to receive any passive income that the property generates on a pro rata basis. 

Bottomline

The landscape of traditional real estate financing is transforming to a blockchain based financial system, called DeFi. Real estate NFT as an innovative application of the blockchain technology plays a pivotal role in DeFi. Property-backed NFT is now considered as a secure collateral for on-chain financing and lending. Besides, real estate NFT, due to several benefits it provides to the real estate sector, would be a lucrative choice for investors who are seeking for new investment opportunities for diversification purposes. 

Despite the benefits, NFT real estate is still in its early days. Hence, serious risks are associated with investing in real estate NFT. The most important is the regulatory risk, as real estate NFT is not regulated well all around the globe. Hence, if you are looking to invest in a real estate NFT project, make sure that the project has got all legally required approvals from the local government.