The Rise of Crypto Creates New Opportunities for Real Estate Investors
In the midst of rising home prices and housing shortages, not to mention the looming threat of increasing interest rates, many real estate investors are wondering how they can continue to grow their portfolios.
Whether you’re simply looking for opportunities to grow or want to jump into the landlord game, the answer comes from an unlikely but up-and-coming place: cryptocurrency.
What Is Cryptocurrency?
It’s unlikely anyone alive today hasn’t at least heard of cryptocurrency, but that doesn’t mean everyone quite understands what it is or how it works in real estate. Think of cryptocurrency as an internet-based money that can be used to purchase goods or services. Even though cryptocurrency is often talked about in terms of “coins,” there is nothing physical about it.
Unlike the dollars and cents we grew up with, cryptocurrency is not regulated by the government. It exists on a decentralized peer-to-peer network. Transactions don’t go through banks. Cryptocurrencies work to solve many of the problems associated with government-backed currencies.
For example, moving between different countries’ currencies can be difficult and expensive. Even moving money from different banks within the same country isn’t as straightforward as you might expect. These are the issues the crypto community is trying to fix.
To ensure that each crypto transaction is trustworthy, every transaction is recorded in a blockchain. Once a block is created, it cannot be changed. That means payments, deposits, and other transactions are verified across a network of computers to ensure everything is accurate.
Today, there are an estimated 300,000 Bitcoin transactions every day, but only about a third of users actually make regular transactions. The other two-thirds are merely holding on to their cryptocurrencies in hopes of future growth.
How Is Cryptocurrency Impacting Real Estate Investing?
While real estate has traditionally been an in-person industry, times are changing. Thanks to cryptocurrencies and the blockchain, many real estate transactions are happening offline. From small condos to massive mansions, investors are using cryptocurrency in all kinds of transactions.
Some real estate agents are even recording their deeds on the blockchain, especially in areas where real estate fraud is a little more prevalent. Keeping records on the immutable blockchain is helping bring confidence back to the market.
In terms of new acquisitions, cryptocurrency has a number of benefits. First, the entire purchase transaction is faster and cheaper. When you skip all of the intermediaries, there’s less processing time and fewer costs. That means you’re not dealing with the line of banks, brokers, lawyers, etc.
Once a crypto payment is made, it takes less than ten minutes to appear in the seller’s account. Since payments are verified via a peer-to-peer network, the funds are guaranteed.
A second perk is the blockchain helps keep information more transparent, something that’s been a struggle in real estate. Websites like Zillow have already helped centralize real estate data, but the blockchain allows for greater accuracy and speed.
For example, take Imbrex, a blockchain real estate listing service. These listings cover the entire globe in real-time, which means you could have the jump on those waiting for listings to appear on Zillow or even the MLS.
Thirdly, cryptocurrencies know no boundary. You don’t have to convert currencies to invest outside of your home country. This is especially important in countries where the local governments limit or even ban overseas investments.
In fact, the Chinese government is enforcing capital controls that restrict Chinese investors from purchasing real estate in the U.S. Many of these investors are now using cryptocurrencies, as this virtual currency cannot be regulated by their home government.
Finally, real estate investors can take advantage of tokenization. Tokenization is the process of breaking ownership of an asset into various shares. Property owners can split their properties into tokens that are more affordable pieces.
Investors can then buy portions of the property without having to buy the entire thing. This process opens the door to investors who may not have the capital for large down payments but want to get in on a hot property.
Crypto for Real Estate Investors & Landlords
With the increase of cryptocurrency in the acquisition and sales of real estate, it’s only a matter of time before property managers and landlords take advantage of this new trend.
The Next Level of Crowdfunding
The idea of buying shares of a property, whether it be a single-family home, apartment building, or commercial building, is nothing new. There are even websites like Fundrise and Roofstock that allow investors to buy shares of properties with as little as $1,000.
Cryptocurrency takes this concept to a new level. Companies like Lofty AI are working on a platform that allows anyone to buy a token or a stake in a single-property rental business (Lofty AI’s Delaware-based LLC) for only $50. Lofty AI’s unregulated marketplace is still relatively small, but it already boasts about 90 vacation properties in places like Ohio, Michigan, Illinois, and Missouri.
When someone buys a token from Lofty AI, they join a team of landlords who help make decisions about the property. This shared ownership and cooperation is called a distributed autonomous organization (DOA). The plus side is that DOAs open the door for real estate investors to take ownership of properties without having to drop a ton of cash. They can simply become 1/50th of a landlord.
The downside of joining a DOA is that even straightforward tasks, like potentially replacing a broken appliance or making an upgrade, might have to go through an entire host of owners. Decisions end up being made through polls and discussions.
The hope is that this kind of collaboration will bring more people and ideas into the fold. For seasoned landlords, it could be frustrating having to go through a committee to make what they believe is the right call.
Landlords are starting to play with smart contracts at various stages of the leasing process. Smart contracts are a digital way of enforcing an agreement. Much like how a computer program works, these smart contracts use if-then statements.
For example, if you pay your security deposit and first month’s rent, then you will be given access to the property. For the contract to be executed, a set of predetermined actions must take place. Once the contract is in effect, it cannot the altered by any involved party.
Details regarding the property and lease agreement are linked together on the blockchain. That means this information can also be linked to rent payments. The fees set forth in the contract can be set to automatically be deducted from the tenant’s account each month. This kind of automation benefits everyone.
Since the lease is publicly recorded on the blockchain, with the names of those involved kept anonymous, it’s difficult for either party to accuse the other of not keeping up their end of the agreement.
Collecting Cryptocurrency as Rent
There aren’t many landlords who currently accept cryptocurrency as rent. Cash and checks are still the major players in this industry. Even though direct online payments like eChecks or payment apps like Zelle are becoming more common, adopting these new payment methods has been a slow process. Many landlords are simply stuck in their ways.
There are, however, companies that are working to help cryptocurrency become a regular part of paying rent. ManageGo, for example, is working towards building a bridge between landlords and tenants. This company is starting to integrate cryptocurrencies into its services. For the moment, this app will simply convert the crypto coin into dollars, which takes away some of the risk landlords worry about.
The reality is that many landlords aren’t confident yet that cryptocurrency will retain its value. The crypto market can appear to be somewhat volatile, especially to those who are just getting started. It will take some time and various trials before accepting cryptocurrency as rent is a common practice.
Looking Towards the Future
Even though cryptocurrency has been around for a while, it’s still in the early stages of development. It’s unclear if and how crypto will impact various markets. There are already opportunities for real estate investors to buy and sell properties with greater ease, across international borders, and with greater transparency.
Thanks to the tokenization of assets, cryptocurrency is also opening the doors to new investors who don’t have the capital to go the typical investing route. Even seasoned investors can expand and diversify their portfolios by joining a DOA.
Of course, the true potential for how cryptocurrency can open doors for investors and landlords is yet to be seen. Smart contracts on the blockchain are already being utilized with success, but it may be a while before renters pay their monthly payments with a cryptocurrency.
Whether you’re new to cryptocurrencies or real estate investing or you’re simply looking to expand your reach, right now is the perfect time to get into the game. Landlords are just starting to scratch the surface of what’s possible when the blockchain, cryptocurrencies, and DOAs become more common practice.