By Strategic Passive Investments
Last year, the real estate sector set all sorts of records. There were records for appreciation, records for rent growth, and records for low volumes of housing inventory. There were “records” in terms of how public health policy affects the housing sector. There were some records that were painful, such as the hits that retail space took in 2020 and continued to take in 2021. As the COVID-19 pandemic slogs on toward endemic status, it becomes increasingly evident that there is not going to be a full “return to normal” in the foreseeable future.
Fortunately for real estate investors, “normal” has never really been part of the equation. As a population, investors excel at taking problems that have stalled out the rest of the world, solving those problems, and creating positive returns in the process. So, no wonder then that the real estate investing world is moving on from COVID-19 to the next topic, and it is a big one: cryptocurrency. The digital currency has taken the investing world by storm and is poised to make a substantial impact on real estate in 2022.
A Little Background on Cryptocurrency
Cryptocurrency is not necessarily a new concept anymore. In fact, it has been around since the 1980s, when cryptocurrencies were called “cyber currencies,” and they began gaining popularity in 2009 with the launch of the now-ubiquitous Bitcoin. In the 1980s, cyber currencies were mainly conceptual, but they did boast the beginnings of the blockchain platforms that decentralize today’s cryptocurrencies and make their transfer secure and anonymous (in most cases).
Bitcoin operated largely as an oddity for about a decade, but the concept took off in 2017 with multiple cryptocurrency launches and the beginnings of a truly impressive bull run for Bitcoin. While the currency remains volatile, its popularity has increased as it becomes easier to invest in the digital currency and, thanks to the pandemic, as people found themselves at home with time on their hands.
So What Does This Mean for Real Estate?
The cryptocurrency “boom” has many real estate investors excited, particularly about accepting digital currencies either as rent or in exchange for properties. One reason is that many digital currencies have exploded in value over the past few years; investors hope that by accepting payments in Bitcoin, for example, and then holding those payments, they may experience the rewards of a similar boom in the future. However, the idea of paying rent in Bitcoin or Ethereum or even Dogecoin is just the beginning.
Here are 4 things real estate investors must know about cryptocurrency in 2022:
1. Regulation is coming.
One of the biggest attractions of cryptocurrency is that it is not reliant on a central authority (read: government) for its value, production, or transfer. As you might imagine, central authorities are not big fans of this characteristic. While Bitcoin stumbled along at pennies in value, it might not have been worth much fuss, but now the federal government of the United States and many other countries’ governments are taking a closer look for multiple reasons, including tax revenue potential, money laundering, and a general fear of losing control.
Investors should be aware that there are currently IRS regulations governing the reporting of digital-currency profits and that there is likely to be increased supervision of these profits moving forward. Furthermore, some entire countries have elected not to permit the use of cryptocurrencies in any form or fashion. China, Egypt, Qatar, Oman, Morocco, Algeria, Tunisia, and Bangladesh have all banned it completely, and 42 others are working to “impede” cryptocurrency use by restricting banks’ ability to deal with it or exchange it. You must monitor regulations not only in the United States but also in any countries where you might have clients.
2. The scams are not over.
Cryptocurrency got a bad name early on, thanks to the anonymity and security of the blockchain that supports it. When mobsters move money, anonymous, secure, decentralized platforms are definitely preferred. However, whether drug cartels are using crypto platforms to launder money or not will likely have little direct bearing on your real estate investing. What is more likely is that you could be taken by a more traditional scam, such as one wherein a con artist takes your money and runs. Because cryptocurrency is decentralized, there is little hope of recovering losses when this happens. If you are dealing with cryptocurrency transactions in your real estate business, be aware that you must be very protective of your digital wallet and that the “buck” will likely stop with you if you lose digital currency entrusted to you as part of your real estate business.
3. Crypto is driving certain sectors’ home prices through the roof.
One thing that has happened in real estate as a direct result of cryptocurrency is that the luxury-home market is exploding. While this home-value tier does not have the inventory issues that other tiers of the single-family sector are experiencing, cryptocurrency is driving many sales through the roof – especially if the seller is willing to accept cryptocurrency directly rather than requiring the buyer to convert to dollars prior to making the payment at closing. In fact, some sellers are putting this “bonus” feature in their listings in hopes of attracting newly minted crypto-millionaires looking for physical assets in which to place some of their net worth.
One 2021 luxury homebuyer explained his purchase simply by saying, “Okay, so what do I do with all this [cryptocurrency]?” He added that many cryptocurrency investors want to diversify into real estate because it is far less volatile than digital currency and can be leveraged in order to acquire more cryptocurrency or other assets. Cryptocurrency can be used as collateral for some lenders, but most do not accept verification of digital funds as a sound basis for extending credit. On the other hand, a multimillion-dollar mansion makes for excellent collateral.
4. Initial Coin Offerings (ICOs) may be used to “mask” syndications.
Finally, real estate investors must be aware that not every digital currency will succeed and, furthermore, in many cases “real estate-backed” currencies are little more than window dressing for other real estate investors raising money to do deals. There are currently dozens of “real estate cryptocurrencies” trading or, more likely, trying to trade while tending to bill themselves as “the first” of their kind. In many cases, the coins are purchased in an ICO and then the money is used to execute an investment strategy like fix-and-flip or renovate-to-rent. Then, the value of the coins grows and holders can liquidate at a predetermined point or roll their coins over. Sound familiar?
The main issue with these funds is that they are funds, not necessarily crypto assets. The idea is a clever one, but it is misleading. In many cases, the “managers” of these ICOs were not terribly experienced investors and the tokens remained untraded and impossible to cash in because the projects never generated enough returns to do so. This is still the “Wild West,” so investor beware.
The Truth About Real Estate & “Hyperbitcoinization”
A passionate real estate investor who also is passionate about cryptocurrency will happily wax eloquent about the future of these two assets and how they are inextricably intertwined. In fact, one such individual recently authored an entertaining opinion piece in Bitcoin Magazine speculating that using Bitcoin to acquire properties might, in the future, be a poor decision because your digital currency could “increase in purchasing power forever” while your real estate is “an asset that is less scare and subject to depreciation and ongoing ownership costs.” Interesting theory.
For 2022, at least, real estate investors must be aware of the ongoing effects of cryptocurrency on the ways in which we do business, but it is probably not time to switch sectors completely just yet. Instead, use your investing savvy to learn more about your options – and invest in some reliable single-family rentals while you’re at it!