How to invest in real estate using cryptocurrency
In 2018, the global real estate market grew from a value of $8.5 trillion to $8.9 trillion. The transfer of wealth through real estate is enormous, but it still operates in a very traditional way. It requires face-to-face meetings with investors, lawyers, and banks. A transaction also takes weeks or even months to set meetings, file paperwork, put money in escrow, transfer the funds, and cut checks.
Cryptocurrency — and the blockchain — offer a solution to the slowly turning wheels of the traditional real estate market. The infrastructure for buying real estate with virtual currencies already exists, and early adopters are taking advantage of it. In 2017, a buyer purchased a single-family home in Texas using Bitcoin and BitPay. Someone else used BitPay to buy property on Lake Tahoe for $1.6 million. Chinese investors are also very interested in using virtual currencies to diversify their holdings away from the prying eyes in Beijing.
In other words, the answer to the question is yes, you can use cryptocurrency to invest in real estate — and people already have. However, before you start shopping, there are a few things you need to know about using Bitcoin to pay for your dream property.
Every Buyer Needs a Seller
Cryptocurrency can be an ideal way to facilitate a transaction for a single-family home or even a highly specialized commercial building such as a winery or brewery. To buy this kind of real estate, or any other for that matter, with Bitcoin or another cryptocurrency, you need a seller willing to accept your offer. Finding a seller isn’t your only issue: you may find someone willing to accept payment in Bitcoin, but you will also need to find a brokerage, title insurance company, and escrow provider willing to support a virtual transaction. Early adopters are also likely to face resistance in terms of proving their identity; sales are highly unlikely to enjoy the anonymity found in other blockchain transactions.
As the market becomes more comfortable with the idea of virtual currencies in real estate, finding both sellers and infrastructure should be theoretically easier. Additionally, it’s also likely the niche will develop around only a few currencies: it is very likely that the relationship between real estate and virtual currency will begin with Bitcoin and Litecoin.
Buyers will likely need to transfer their niche currencies into a more ‘mainstream’ currency for acceptance. It goes without saying that Bitcoin and Litecoin are well-established currencies with both name recognition and greater stability in market conditions, at least compared to the particularly volatile offerings. Given that real estate is a give-and-take transaction, neither sellers nor brokerages will be keen on currencies that could crash before they have a chance to cash in.
Beware the IRS
Perhaps what will continue to hold back the widespread use of cryptocurrency both generally and as a tool used in large investments like real estate is the treatment of cryptocurrency by the IRS. Despite some incorrect suggestions to the contrary, real estate transactions using cryptocurrencies are a taxable event. If you use a popular wallet, the IRS may also already have your data. It’s increasingly difficult to hide your holdings from tax authorities.
The issue is that five years after its initial guidance on the taxation of cryptocurrency, the 2019 IRS update on taxing cryptocurrency as income or as assets demonstrates a fundamental misunderstanding of how the technology works. It also fails to grasp the spirit of cryptocurrency itself.
The tax issues impact both buyers and sellers. Even if you hire an extremely savvy CPA, their skills don’t negate the fundamental issues that arise with the IRS guidance forking, appreciation, and more. Investors also must consider the additional amount you can expect to spend on accountancy fees by complicating your returns in this way, as well as the risks involved in dealing with the volatility of cryptocurrency generally.
Blockchain Benefits Real Estate Transactions
The option to buy with cryptocurrency first and foremost relies on the real estate industry’s adoption of the blockchain, and there’s a good chance this will happen sooner rather than later. At present, buyers and sellers rely on the synergy of the long list of professionals involved to make a transaction happen. The blockchain cuts out some of these intermediaries (namely, banks), and it has the potential to eliminate the costs of these roles without inherently risking the security of the transaction.
What is more, the blockchain can potentially make real estate a more liquid investment. For example, blockchain uses “smart contracts,” which are self-executing agreements based on the decentralized network and means eliminate the need for paper transactions and central authorities. Every thriving business should have property insurance, and these contracts are already being used for title insurance. It’s only a matter of time before they move into adjacent industries. The blockchain serves real estate without risking the trust and security needed for such large transactions (both for investor’s peace of mind and to meet government and tax regulations).
Of course, there are issues with account security that could scare off traditional investors – at least at first. Hacked wallets or a lost key threaten an entire transaction. A blockchain transaction is also irreversible unless the recipient agrees to return the funds in a new transaction. However, smart investors will ward this off both by taking the appropriate security measures, including both technological measures for protecting their wallets and in verifying the identities of buyers and funds, when possible.
You Can Buy Real Estate with Bitcoin Today
Yes, you can buy real estate with cryptocurrency, and many investors could soon see it as an opportunity to utilize the blockchain to improve the market as a whole. However, despite the benefits of using virtual currencies, we are still missing out on some of the tools and infrastructure needed for such large transactions that involve digital currency and physical property.
Even so, as investors, developers, and the IRS adapt to the potential offered by cryptocurrency, you can expect to see more “Bitcoin Accepted” on the For Sale signs in your neighbor’s front yards.
Will the allure of the blockchain be enough to lure in key players who could make real estate a more crypto-friendly world? The chances are good, but the future of cryptocurrency has yet to be written.
Written by: Indiana Lee, BOSS contributor