In 2021, multifamily real estate investments are forecasted to reach $148 billion, a 33% increase from 2020 numbers. Although it’s hard to estimate the precise market cap for cryptocurrencies per country due to the nature of the market, in June 2021, it was roughly 600 billion U.S. dollars. That’s 4X of the real estate investments forecast.
Why is that?
There are many misconceptions about real estate investing, such as high barrier to entry, pre-requisites for investors (sophisticated/ accredited), liquidity, and one’s level of education on real estate investing. This is what makes multifamily real estate investing seem so lucrative.
However, with modern technology and real estate syndication software, you can invest in deals in a few clicks. More on that later. Now, let’s dive into our analysis of both investing options and discuss tips for comparing multifamily real estate investing to crypto.
Tip #1: look at appreciation of real estate vs. crypto
Real estate
Appreciation is the ability of an asset to go up in value over time. As for the real estate, we would give it an 8 out of 10 in appreciation. This is because real estate goes up in value relatively slowly compared to other types of investments.
While it keeps up with the inflation, for housing, it is usually 3-4%/ year, and for commercial properties (including multifamily), it can reach 5% and more/ year. However, you need to consider that you can borrow money against real estate assets with significant leverage. And, if your investment goes up by 4%/ year in appreciation and you put only 25% as a down payment, it’s actually 4X4% and you are at 16% appreciation on the cash you invested.
Crypto
Here we should admit that crypto has a long-term upside with the potential of exponential gains. For example, Bitcoin’s value has increased by almost 6000% in the past five years despite the volatility.
Moreover, some institutional investors and governments are warming up to crypto. For example, El Salvador declared Bitcoin as a legal tender, and JPMorgan is the first major bank to allow retail crypto fund assets.
The demand for crypto and, as a result, gains might go up with Binance, Coinbase, and other exchanges issuing debit cards to pay and withdraw cash with crypto and PayPal announcing that users in the U.S. can use crypto for their transactions using PayPal accounts.
However, because we don’t have enough historical data and observe extreme volatility, we have to give crypto an Unknown grade for appreciation as well. Moreover, what we know about currencies in general (cryptocurrencies too) is that they are not appreciating because they are not adding any intrinsic value year after year. Currency fluctuates and has aberrations in its value because of public opinion (think Elon Musk), but it’s not appreciating based on value.
Tip #2: measure the financial leverage
Financial leverage of real estate
Leverage is the ability to borrow money, and with this criteria, real estate is by far an A-grade asset. It’s because you can get the most extended amortization schedules with the lowest interest rates and the lowest down payment with real estate compared to any other investment vehicle. We already mentioned above that you could magnify your appreciation when you borrow, thanks to real estate’s leverage.
Borrowing money works slightly differently for passive investors and syndicators in multifamily real estate syndications. But it’s a topic for another article. Still, we have to note that the criteria we’ve outlined here apply to real estate investing in general as well, not only multifamily syndications.
Real estate gets a 10 out of 10 for leverage.
Financial leverage of Crypto
We would give crypto a 3 out of 10 here. While you can still borrow money against crypto, it will be a very short timeline (1-3 years), a high interest rate, and the LTV is very low. Remember that borrowing money against crypto, stocks, gold, etc., is based on your personal income. These investment vehicles aren’t offering any capital. There is nothing to help offset monthly payments, unlike with real estate.
Tip #3: look at the downside risk with crypto vs. multifamily real estate
Remember the first rule of investing by Warren Buffet? “Don’t lose money!”. So downside risk is one of the significant criteria for investing.
Real estate
There have been a few periods when real estate has gone down in value. It happened in 2008 through mid-2011. Moreover, if you research certain regions of the U.S.A., such as the Bay area of C.A., there was a quick drop in real estate prices in 2001 during the tech bubble burst.
However, despite these drops, most of America didn’t observe huge real estate drops in 2001. Even from 2008 to 2011, many regions didn’t lose value in real estate. They didn’t gain as the prices stayed flat, but dropped neither. Among such places are most metropolitan cities in Texas, some cities in Oklahoma, and a few more. When you look at the history of the real estate market, you will notice that it’s extremely rare to see drops. Here is the chart by U.S. Census Bureau to illustrate that.
Another way to assess downside risk with real estate is to look at banks and where they are willing to lend the most money for the most extended amortization schedule, lowest interest rates, and lowest downpayment. Remember, banks are conservative.
What do banks like the most?
The answer is – real estate. Consequently, the gold standard for collateralization of a loan with a bank is real estate.
Based on these facts, we will give real estate a 10 out of 10 in downside risk.
Downside risk with cryptocurrency
When comparing real estate to crypto, it’s hard to assess downside risk with crypto simply because the history we have is relatively short. In the past few years, crypto went up in value tremendously while also being highly volatile.
Anyone playing Bitcoin will need to live through some crazy price swings. In 24 hours (Aug 17), in just one day, we see Bitcoin go from $45,462 to $47,058, a rise of 3% in less than 24 hours. Just four days earlier, Bitcoin was $43,953.
Real estate, stocks, or even cash in your bank account don’t fluctuate like this.
So if you invest in Bitcoin, be ready to spend time monitoring it, just like with forex trading.
Another downside risk with crypto is the lack of security. If someone discovers your private key, they can access your wallet and steal your crypto. Crypto exchanges can get hacked too. Remember the Mt. GoX hacking incident that lost $460 million worth of Bitcoins in 2014. The lack of security happens because crypto is unregulated. Your tokens are not insured like your money in the bank or your regular investments. If someone steals your Bitcoins, you lose them forever.
Lack of regulation means price manipulations. For example, in 2017, just 1000 users owned 40% of all bitcoins, aka Bitcoin “whales.” Or the story about Tether that was used to pump the price of Bitcoin in 2017, which was later found out by John Griffin & Amin Shams.
Based on these facts and the lack of historical data, we will give real crypto a 1 out of 10 in downside risk.
Tip #4: look at the liquidity
Real estate liquidity
When comparing real estate to crypto, liquidity is the biggest argument against real estate investments for most people because it is sometimes hard to sell or liquidate your assets quickly. For example, if you put your funds in a multifamily syndication, you are likely to be invested for at least five years. Here we would give real estate a 7 out of 10.
However, with the leverage that real estate provides, many lenders offer quick access to liquidity for passive investors as well. Moreover, in a lot of cases, financing allows you to avoid triggering a tax liability.
Crypto liquidity
We won’t go into detail here as it is evident that crypto gets a 10 out of 10 for liquidity. You can instantly sell all your crypto investments or even use crypto debit cards as any other payment card for your transactions or ATM withdrawals.
Tip #5: look at the cash flow
Cash flow with real estate
Real estate wins and gets a 10 out of 10 in cash flow because it is created for cash flow investing. Of course, there are circumstances and possibilities, like unexpected vacancies. But those are exceptions to the rule.
Even if you are buying a portion of an asset, like in multifamily syndications, it generates cash flow due to proceeds from rent payments. For example, the property has 100 units, and each unit rents for $1,000/month. If we subtract an expense ratio of, let’s say, 30%, the net income per month on that property is $70,000. While some portion of that net income will be kept in reserves, the remainder is available for distribution to investors.
With real estate, we can say that you get to keep your golden goose and, in the meantime, collect your eggs without selling your goose.
Crypto
Crypto gets a grade of 1 out of 10 as it generates no dividends or cash flow for investors. Yes, there are some projects like cakedefi.com that advertise cash flow from crypto. However, we don’t have much data to confirm if it works.
Tip #6: compare the tax benefits of crypto vs. real estate investments.
Tax benefits of real estate
Real estate investment gets a 10 out of 10 for tax benefits it offers to investors. There are several tax benefits you can get from real estate:
- 1031 exchange. You can sell one property, and if you have significant capital gains from the sale, you can defer these gains and free more capital to invest in your next deal. It’s important to note that there is no way not to pay taxes at all. To offset capital gains, you have to invest in another property the following year. So to keep delaying your taxes, you need to invest more and more.
- Real estate investors, in some instances, can make specific improvements or value-adds to a property that impact its cash flow or appreciation. As a result, they can get a 100% tax deduction on the entire improvement in that calendar year. So while your property improvements are tax-deductible, you get more cash flow and appreciation. These kinds of tax benefits allowed companies like Amazon to build massive warehouses and take advantage of substantial tax deductions.
- Depreciation. It is the ability to have a phantom loss on your tax returns and reduce your taxable income. The multifamily depreciation period is usually 27.5 years. However, multifamily investors who often hold a property for five years or so can apply accelerated depreciation that often exactly matches the holding period.
We will publish a more detailed article on the topic of tax benefits for passive real estate investors. But based on the above, we can say that real estate is a government-subsidized investment.
Crypto
There are no tax benefits for buying or owning crypto. Therefore, it gets a 0 out of 10.
Here is a quick comparison chart that you can use for your future reference:
Conclusion
Remember, one doesn’t exclude the other. You can continue investing in crypto and start your real estate investing journey. Or even invest in real estate using your crypto assets. For example, in June 2021, a $22.5 million Miami Beach penthouse was purchased with cryptocurrency. Some syndicators accept crypto payments from LPs too. Contact us to find out more.
But suppose you are looking for a long-term investment that offers you unparalleled leverage, stable appreciation, an array of tax benefits, and regular cash flow. In that case, real estate is your option.
We understand that even with multifamily syndications, the barrier to entry for real estate is higher than for crypto (usually starts at $50K for most syndications vs. $1 for crypto). However, many solutions are being developed to make real estate investing more affordable, like fractional homes and crowdfunding. At Cash Flow Portal, we are also working on a real estate investor portal that will surprise you very soon.
