High return is possible with this creative strategy
Bitcoin has risen from $6,700 per coin to $58,000 in the past year. That’s an 860 percent annual increase and, frankly, that’s the average for what Bitcoin has done over the past five years. Who wouldn’t want a piece of that? And Bitcoin is not unique in its out-of-this-world appreciation. Many cryptocurrencies follow similar trajectories. If you own real estate and you are thinking of selling, perhaps you should consider selling for cryptocurrency.
Selling for cryptocurrency is not for the faint of heart. If you are the type of investor who colors within the lines and always plays it safe, this isn’t for you. But then any creative approach will not be comfortable for that type of investor. If you think exploring new territory and potentially getting returns more than 100 percent annually is worth some effort, read on.
A typical deal would be to either sell for cryptocurrency or, if you have debt, accept a down payment in cryptocurrency and have enough cash to at least pay off your debt (lenders don’t accept crypto yet). Or maybe you just accept the deposit in cryptocurrency. There are numerous ways to structure deals to include cryptocurrency as a component.
There are also many reasons to accept crypto for your real estate, but we will focus on three of them here. The first, of course, is the rapid appreciation that can be realized with cryptocurrency. I own cryptocurrency that has appreciated around 120,000 percent over the past three years. Compare that to selling for cash. Dollars devalue every year and by a lot more than the consumer price index. The Chapwood index shows inflation at about 10 percent per year meaning if you hold those dollars for three years your purchasing power is about 75 percent of what it was when you got them. Holding cryptocurrency instead means that when you go to buy more real estate you will have more purchasing power.
Despite the fact that a seller will do better by accepting cryptocurrency, very few sellers will do so. And cryptocurrency, while it appreciates like nothing else, often has limited liquidity. A smart seller will use that lack of liquidity to ask for more cryptocurrency than they would dollars. A buyer who wants to use cryptocurrency may be willing to pay the additional price in order to diversify into real estate. The second reason to accept cryptocurrency is to get a better price for your real estate. To flip the old saying, “their terms, your price.”
The third reason is a little more complicated to explain. When you sell your real estate for cryptocurrency, you are actually trading an asset for another asset. If I trade you an apple for an orange, is there a capital gain? It’s hard to know. It depends on how much I paid for the apple (my basis) and ‘how much’ the orange is worth. The difference is my gain or loss. To continue the metaphor, if I picked the apple from my backyard and you were given the orange by your mother, we might both technically have a negligible basis. So how do we value the exchange? We could say the prices are $0 or $1 or $2.50 or $10. And if we said the exchange was worth $1, we would both have a capital gain.
The same thing happens when you trade real estate for cryptocurrency. If my cryptocurrency has appreciated thousands of percent, my basis is near zero. If you have owned your real estate for a long time, its value may have appreciated substantially. Isn’t that one of the reasons we invest in real estate? But either of us may sell for market value, more than market value, or less than market value depending on our circumstances and our objectives in making a particular investment. As buyer and seller, we can mutually agree on a sales price within a reasonable range that can manage the amount of our capital gains. We may be able to reduce our capital gains exposure by selling for cryptocurrency. It’s not possible to do that when you sell for dollars. A dollar is always valued at $1. The third reason to sell your real estate for cryptocurrency is for tax advantages.
The good news is that you can realize all three of these advantages in a single deal. You can sell your property for an appreciating cryptocurrency for more than you would have asked for your property in dollars and still manage the capital gains. This kind of creative deal structuring can help your real estate investing rise to a whole new level of returns. Cryptocurrency for real estate is possible now and will become common in the not so distant future.