10 Reasons why Real Estate is a Better Investment than Bitcoin
It’s now 2018 and with all the recent speculation about the rapidly emerging cryptocurrency markets, investors are looking for new places to park their money. If you were able to take a look at my Facebook feed, you would swear my friends were becoming millionaires overnight every time bitcoin hit a new high. As a former currency trader (Euro, Dollar, Yen, British Pound, etc.), I couldn’t help but get that trader’s itch to start trading Bitcoin, especially when I saw it used the same charting patterns and technical analysis as Forex, “Foreign Exchange.” I traded for years which is long enough to understand technical analysis when it comes to reading charts.
I won’t lie, for Forex to be my first love, I never became the next black Warren Buffet like I wanted to, but I did develop the title as Austin “Young Investor” Smith. I had even prematurely started a company called SmithInvestors where I was planning to start a mini hedge fund.
Being completely honest and transparent, I’m not a wall street trader nor have I made hundreds of thousands of dollars in the Forex world, but I do understand the financial markets and I do feel that I can analyze cryptocurrencies in the same manner. Before I jump into why I firmly believe real estate is, and will always be, a better investment than Bitcoin or any other cryptocurrencies, I will note that I am NOT your financial advisor nor your pockets. You can put your money wherever you feel makes sense for the goals you are trying to achieve. I even had one of my Bitcoin investor friends tell me “Bitcoin will be the currency of the future. Bitcoin will be used to by real estate!”
That statement alone is exactly my point.
When you look up the word “able,” in the dictionary, some will define the word as “having the power, skill, means, or opportunity to do something.”
I consider real estate to be the investment vehicle of “ABLE’s.”
Real estate is Cash-Flowable, Controllable, a Tax Deductible, Satisfiable, Valuable and Variable, Equitable, Re-financeable, Leverable, Tangible, Willable, and Suppliable.
Whoever says that last sentence 10x fast gets $100. This is officially, an unofficial contest.
Bitcoin is not a company, therefore it does not pay dividends to its investors, at least not in a straightforward way as say, stock in Apple. Therefore, the only cash that you will see are the profits when you liquidate any of your positions; releasing some of your equity in the security.
All you can do in the meantime is check in on your position: Did it go up or down today and how does that affect your potential profit and equity? Want to feel the cold, hard cash of your investment? You sell. The only way you can profit “again” is buy buying low and selling high.
My business partner and I, who happens to be my significant other, are cash flowing about $820 a month passively on our property and that’s after all expenses are paid. Even if we were to set aside $200 a month for routine maintenance and repairs, we are still looking at close to $7,500 for the year in extra income. That’s NOT including the equity we are building as the tenants pay down the mortgage, but I’ll talk about that aspect later in this article. That’s also NOT including the $13k-$14k that we are saving as a result of not having to pay rent.
That’s about $20k for the year that goes into our pockets. Again, NOT including the equity that is being gained.
To a certain extent, you are in control of your real estate investment. What do I mean by this? I mean I have a little more control over my income. At any point in time, I can raise or lower rent. If I wanted to, I can easily make an extra $300 a year just by charging an extra $25 a month. I can only make more money in cryptocurrency if I invest more or if the security continues to appreciate. I’m only somewhat in control and even in this example, I would have to put more money at risk.
If something breaks at my house, I fix it. If I wanted to improve something, I renovate it.
With real estate, if I’m putting more money into the property to renovate it, of course I can ask for money in rent thus recouping my initial cost to renovate and gaining more in the long run.
Don’t get me wrong, I just can’t start charging a high amount for rent just to make more money, I have to abide by the current market value and local landlord/tenant laws. Nonetheless, I still have control about how I want to manage my property and how much rent I want to charge. An extra $25 a month is reasonable, maybe even an extra $50, but anything above that and the market may not respond to my liking. The point is, I have control in certain areas. With Cryptos, you relinquish majority of your control except what price you choose to buy and sell at.
One of the biggest arguments that Bitcoin and cryptocurrency investors pose is that the virtual currency cannot be taxed.
If you even think that the US government is going to allow you to cash out on profits without Uncle Sam getting his cut first, you’re sadly mistaken.
This section isn’t to boast about how rental income can’t be taxed, because it definitely is. It’s more about how deductions can help keep more money in our pockets and not Uncle Sam’s.
Here’s a quick financial lesson tied into this topic. Most of the time, us Americans are looking for the next raise, or the next big bonus as the solution to our financial issues. Jumping from a salary of $60k-$70k looks like a huge jump on paper, but of course you know that raise will also include the additional $10k being taxed which is more like a $7k raise. Meanwhile, that raise comes with a LOT more work and responsibility as “justification” for that raise. The extra $7k over the course of a year is only $583 a month, and an extra $291.50 per paycheck. Meanwhile, you’ve now added an additional 15 hours worth of work on a weekly basis. Is it truly worth it?
I gave that analogy because, yes, our $7,500+ of rental income will be reported to Uncle Sam and yes he will get a small cut, but with tax deductions, we can bring that $7,500 reported figure down to a smaller amount and thus a smaller cut for Uncle Sam.
Also, remember the $13k-$14k we save from living rent free?
That’s actually ours.
No tax is involved.
It’s not income. It’s saved money.
That’s why I’ve recently developed the mentality of looking for ways to save my next $1,000 first before looking for ways to earn my next $1,000.
Another great real estate tax incentive is “depreciation.” As the years go on, it’s obvious that our property will not be in the same shape it was when we first bought it, but that doesn’t matter. We aren’t slumlords, so we’ll be maintaining to keep it in the best shape for our tenants, but as far as Uncle Sam, he won’t be stopping by the property any time soon to see that. We still will be able to use “depreciation” as a tax deductible. We will be able to attribute a certain percentage of the home’s value as depreciation and use it as a tax deductible, even if we did a complete remodel.
Could you imagine trying to convince Uncle Sam to count the pullbacks within Bitcoin’s trend as depreciation?
Imagine this, you recently decided that Bitcoin is overvalued and would like to invest in a cheaper cryptocurrency that is bound to explode. You have profits from your Bitcoin investment and now you would like to use those profits to invest in say Ripple, another cryptocurrency, which is currently trading just under $3.50 at the time of me writing this article.
All you have to do is sell your Bitcoin equity and reinvest it in the cheaper currency right? Wrong! You technically have to pay taxes on those capital gains.
Introducing the 1031 Exchange for real estate investors. This savvy strategy allows you to take the profits you’ve earned when you sell your investment property and use those profits to purchase another real estate investment, essentially deferring your capital gains tax until the next property is sold – or you can just do another 1031 exchange and save yourself from getting taxed.
These are just a few examples of the tax benefits when choosing to invest in real estate.
Real Estate satisfies a basic human need. You don’t need Bitcoin to survive, but you’ll always need food, water, and a place to live – and the way I see it, the human population count isn’t going anywhere but up, therefore the demand for somewhere to live will ALWAYS be there. Even if my partner and I found ourselves in a situation where we needed a tenant to move in right away, we could easily decrease the rent to encourage demand without a problem.
Valuable and Variable
I don’t think there is any way to argue that real estate will continue to appreciate in the long run. I was recently listening to a podcast and the speaker was talking about the days where he was buying property in Texas for $3,400 and selling it for $12,000. These numbers are not a typo, but you’ll also have to understand that that was 50 years ago. Real estate prices have gone up since then and will continue to go up in value.
In fact, that is probably one concept that bitcoin can compete with real estate over.
Appreciation. Bitcoin can and has appreciated extremely quickly!
We’ll compare it this way – an undervalued cryptocurrency vs. an undervalued property.
With cryptocurrencies, I can only profit if I were to buy it undervalued and sell it at some point in the future at an appreciated amount. That’s it. There’s not much more you can do with that undervalued security.
With real estate, I have options with an undervalued property. I can wholesale it, flip it, buy & hold it, or even help the seller sell the property as a real estate agent and collect a commission check. I have an arsenal of ways to make money with the same undervalued property.
Are there even Bitcoin or cryptocurrency salesmen?
Equitable and Refinanceable
At some point in time in the future, as the tenants continue to pay down the mortgage and increase our equity, we’ll be able to refinance. We have the opportunity to lower our monthly payments which increases our overall profit, refinance out of the FHA loan and into a conventional loan (which would lower the monthly payment even more by removing the mortgage insurance), and even pull out equity in the form of cash to invest in another property or go on a celebratory vacation; the latter is better, the former is smarter.
Either way, it’s a definite benefit to help us leverage our capital to invest, and even if the economy tanks, people need a place to live and as tenants continue to pay, the property will remain an income producing asset.
Is there an opportunity to be underwater if the market tanks? Possibly. But I think I speak for all real estate investors when I say a property under water that is being paid for by someone other than the owner(s) is a much better “worst case” scenario than being responsible for those monthly payments AND having the property not be worth the amount your paying.
The strategies of creative financing in the real estate world are plentiful. You can literally invest in real estate with no money. Real estate is extremely leverageable.
Investing in real estate with no money isn’t an everyday thing, it’s extremely difficult, but it’s possible for sure!
Can you buy Bitcoin or any other cryptocurrency without any money? I mean, I guess you can convince an investor that’s your partner to buy cryptocurrency at an amazing price, watch the value increase, make them a profit, and then have them give you a cut, but is there a way for you to still retain ownership of those shares? I don’t think so.
The closest example is exactly what I was trying to do when I was trading forex; invest other people’s money.
Individuals who wanted to invest in forex, but didn’t know how to, would park their money with me as I made trades on their behalf. Whatever profits I made my clients, I would receive a small percentage as my service fee. Remind you, I didn’t own their shares or positions, I just managed it for them.
It’s almost similar to me finding an investor who had the money to invest in real estate, but didn’t have the time to search for deals, nor did they want to spend time managing the rehab project. I would exchange time for money. I’ll do the dirty work of finding deals and managing the rehab project if they were to provide the funding. We both would profit and be on our merry way.
Depending on the property, however, there may be an opportunity to gain ownership after you and the investor part ways by refinancing out of the investor’s funds and into a conventional loan or a commercial loan. Here’s a quick example:
I find a multifamily unit for $100k. I know it needs $50k worth of work and once it’s beautiful, it will have an after repair value (ARV) of about $350k. I would take out a hard money loan and have a private investor put up the cash needed to fund the deal. Usually with hard money loans, they will require 10-20% down on the purchase price (they usually fund 100% of the rehab cost). In this case, that’s $20k for a down payment. With holding cost such as taxes, insurance, interest payments, utilities, etc. Let’s say this amounts to another $10k for the entire project, so $30k total that my private investor would need to put up.
When it’s all said and done, I’ll be all in to the property for $150k – purchase price plus rehab costs.
Since I need to pay off the hard money loan, once the project is complete, and tenants are in the property, I will refinance into a conventional loan. Since banks usually refinance at 70-80% of ARV, let’s say we found a bank that will lend 70% of the ARV ($350k) which equates to $245k. With a $150k loan to payoff, that leaves $95k of equity that can be converted to cash. Obviously to get an investor to invest in anything they will want to see a percentage return on their investment. Since the investor brought $30k to the table, he will get that back plus profit. For this example, let’s say I gave him a 15% return on his money so he will receive $34,500 when I refinance. I still have $60,000 to work with. I can use that to buy another property and mind you, I didn’t put up a dime in this transaction, I just bought a deal to an investor who had the cash, and now I own a new rental property to add to the portfolio.
If the entire process only took 6 months, what investor wouldn’t want to sit back and collect 15% on their money in that amount of time. If it came down to it, I could also sweeten the deal by offering more ROI as part of negotiations for them to lend me the money.
I guess for crypto’s you can “buyout” your investor’s shares, but I’m not even sure if that makes sense to do.
You can touch it, feel it, look at it, smell it, hear it, and if you desperately wanted to, taste it.
Straight. Like. That.
Planning on passing down property to your family when you peacefully exit stage left? No problem. Real estate is williable and very easy to set up.
Are cryptocurrencies williable?
According to Jeff Roberts of Fortune Magazine, “Bitcoins are a virtual form of money protected by unbreakable cryptography. This attribute makes it a secure way to store wealth but also creates the risk that when Bitcoin owners die, their digital fortune will be out of reach forever.”
While I do expect this to change in the future, if someone were to pass before this issue is resolved, potential family fortunes could be lost.
Real estate can definitely be created, expanded, and developed. That’s not to be confused with land. Land cannot be created. As my fellow New Jerseyans can recognized, real estate is be being built upward in the form of apartments and condos. Especially with more millennials choosing to rent in commuter friendly cities like Jersey City, Hoboken, Newark, East Orange, and Harrison just to name a few.
While I understand that the emerging cryptocurrencies are developing ways to create an endless “Supply,” Bitcoin has a limit unfortunately. 21 million Bitcoins is that magic number.
It’s the ever looming question “What will happen when consumers gobble up all of what Bitcoin has to offer?”
Analyst are estimating that the virtual currency will run out somewhere between 2050-and 2150 based on how our market is currently responding to the phenomenon.
All that to say….
I am not your financial advisor and while I do have years of experience in the financial markets, I am not an expert of Bitcoin or other Crypto’s. I am an expert in real estate and I do understand that cryptos work in similar nature to growth stocks.
Maybe this is the new “tech boom” where those who invested in the early stages of Google are probably on a beach right now. Maybe crypto’s are here to stay and will, in the future, become the global currency of choice. Maybe my friend is right about Bitcoin and other cyrpto’s becoming the currency of choice when purchasing real estate.
Maybe I’ll even feed my trading itch by dabbling in trading cryptos. Many of my friends have suggested I do so. After all, I’ve always told myself I would get back into Forex trading.
Here’s what I do know…
Real estate is never going anywhere, nor will it depreciate in value (in the long run). As long as the human population continues to increase, so will the demand for housing. And with these 10 reasons, my financial focus is on real estate.
Do you have experience with either investment choice? Comment about your experiences below!