A property ownership through tokenization

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In my previous article on real estate tokenization, I explored how this promising innovation has stalled despite initial excitement about its potential. The truth is that without a clear economic purpose, tokenization is doomed to remain a niche concept. We have not yet seen the broad adoption we expected because the economic justification is not yet there.

For years, I have advocated for a blockchain real estate registry that would introduce title tokens that directly represent property rights, not just securities or investment claims. While governments have been slow to embrace the idea, I have continued to explore how tokenization can serve a real, practical purpose in real estate.

And then I realized this: an innovative approach that combines tokenization with decentralized finance to create a fourth way of owning property. Something completely different; What I call IVVIA. Derived from the Latin word ‘IV via’, meaning the fourth way, IVVIA offers a new way to acquire property.

Meet the fourth method: IVVIA

We all know the traditional ways of acquiring real estate: cash, mortgage or leasing. Each of these has disadvantages. Cash purchases are unattainable for most people, mortgages require long-term commitments and high fees, and leasehold purchases do not offer a route to ownership or return on investment. But what if there was a fourth way, combining the benefits of ownership and investment with the flexibility of tokenization?

IVVIA’s idea is quite simple; It allows a property buyer, let’s call them “ivviator”, to gradually purchase their home by purchasing tokens that represent fractions of the property. This is similar to a mortgage in that buyers can make monthly payments, but without the rigidity of a bank loan. Instead, they partner with real estate investors called “ivviatees” who hold the tokens. Wrappers buy these tokens at market value over time, just like paying off a mortgage, but with much more flexibility and fewer fees.

Unlike a mortgage loan where you are locked into a 20-year financial agreement, IVVIA allows you to purchase tokens at your own pace. Let’s say if the ivviator (host) wants to move to another city, he can sell his accrued tokens at market value and walk away. Investors, on the other hand, enjoy liquidity. They can sell their tokens to ivviator or on the open market whenever they want.

Source: Courtesy of Oleksii Konashevych

Relationships are managed through a smart contract that automates many routine transactions, from token sales to monthly rent payments. The beauty of this model lies in its flexibility and transparency, all supported by blockchain.

IVVIA’s economics: Real world scenario

To test the viability of this concept, I consulted two decades of historical market data from the Australian Bureau of Statistics, including property prices, mortgage rates, rent and bank deposit rates. I modeled the potential outcomes for both conventional mortgages and the IVVIA system, and the results were striking.

Take the case of Alice, who bought a two-bedroom house in Sydney’s middle-ring suburb of Auburn for $520,000 in 2004. She took out a 20-year mortgage with a 20% down payment of $104,000 and an average interest rate of 6.44%. This meant monthly repayments of $3,175. His total expenses over 20 years, namely loan interest and house price, are $866,000. Fast forward to 2024 and the property is now valued at $1,400,000. If Alice decides to sell, her net profit will be $533,000 ($1.4 million minus $866 thousand in total costs).

Now let’s compare this to how events will develop in the IVVIA system. Instead of taking out a mortgage, Alice partners with four investors (Bob, Chuck, Dave, and Eve) who each contribute $104,000 (equal to Alice’s 20% down payment). They are also typical individual real estate investors who would otherwise go to the bank. Instead, they create a unit trust together, buy the house, and tokenize it, with each member receiving an equivalent amount of tokens.

In this scenario, Alice continues to pay $3,175 per month, the same amount she would pay under her mortgage, which we will call the Spending Cap. But instead of paying back a bank loan, Alice splits her monthly Spending Cap between renting and buying her investors’ tokens.

Here’s how it works: Initially, Alice paid rent to her co-investors based on their ownership of the property. Since Alice owned 20% of the tokens, she would pay 80% of the rent to other investors. Assuming the starting market rent is $1,216 per month, Alice’s share of the rent would be $973 (80% of the total). The remaining $2,202 from the Monthly Spending Cap will be used to purchase tokens from its co-investors at a price that reflects the current market value of the property.

Source: Courtesy of Oleksii Konashevych

In the first month, Alice was able to purchase 1.30 tokens on the property’s new value of $521,000, bringing her total ownership to 20.44%. Over time, as Alice’s ownership share increases, her rent decreases. After ten years, he will own almost 79% of the property, reducing his rent payments to just 21% of market rent, or $368 per month. At this point the house would have increased in value to $745,000 and Alice would be purchasing approximately 1.1 tokens per month.

After 15.5 years, Alice would own the property outright, having spent a total of $700,000, including the initial down payment, rent, and token purchases. This represents a significant savings of approximately $166,000 compared to the traditional mortgage route.

Investor’s perspective

What about investors? The basic scenario for them mirrors Alice’s mortgage. In IVVIA, investors make a profit from both the rent and the difference between the initial token price and the sales price, according to their shares, starting from the month after the purchase of the house. A simple calculation shows that a $104,000 investment could yield a total return of $44,000.

However, we need to add some conditions to make it similar to a mortgage. While IVVIA allows investors to receive monthly cash flows, mortgages require a portion of household income to be tied to monthly repayments for 20 years, effectively locking wealth into the value of the property. Therefore, to make the comparison fair, we assume that Bob, as one of the investors, does not spend the rental profit or token sale proceeds, but accumulates it in, for example, bank deposits, similar to how a landlord accumulates equity. After 20 years, this accrual could result in a total of $1,200,000; This is 140% more than the $533,000 he would earn in a traditional mortgage scenario.

Source: Courtesy of Oleksii Konashevych From a naive solution to a real-world solution

While IVVIA offers a real solution to the challenges of real estate tokenization, there are some hurdles to consider. Long-term investments, such as real estate investments, can face legal problems such as disputes, bankruptcies, and even the death of vines. A simple smart contract does not easily solve these problems.

For IVVIA to scale up, we will likely need professional smart contract administrators who can manage the system impartially, address legal complexities, and ensure compliance with evolving regulatory frameworks. Despite the challenges, the advantages of automation and decentralized management still make this a much more efficient system than traditional real estate financing.

The idea of ​​tokenizing real estate is not new, but what IVVIA brings to the table is a real economic solution. By combining the flexibility of tokenization with the stability of real estate, IVVIA solves the problem that has prevented property tokenization from becoming mainstream. This isn’t just another blockchain use case; This is a real shift in the way we think about property ownership and investing.

IVVIA works because it offers individuals a flexible path to homeownership while aligning the incentives of buyers and investors, transforming property into a dynamic, tradable asset. IVVIA may very well represent the future of real estate by leveraging smart contracts, DeFi, and fractional ownership; A fourth way that could become the new norm.