Every individual is concerned with the returns when it comes to investing money. Therefore, there are different asset classes where one can invest depending upon their risk appetite. Crypto and real estate seem to be two different asset classes where one can contemplate investing their money. Both the asset classes have their share of pros and cons based on their risk and returns. So, let’s proceed to dive into each one of them.
Crypto Investing and Its Pros and Cons
Cryptocurrencies are virtual or digital currencies and are based on decentralized networks such as blockchain. Cryptocurrencies are not issued by any central regulatory authority and function on a distributed ledger. The most popular cryptocurrency is Bitcoin, which Satoshi Nakamoto created in 2009. Bitcoins are produced through mining by miners by solving complex mathematical problems, and in return, the miner is rewarded with one Bitcoin.
Pros of Investing in Crypto
- Cryptocurrency is decentralized, and no one regulates it. The transfers happen through private connected computers, and the transfer of bitcoins is shared via blockchain. Since the government has no control over it, it cannot simply print it, which often leads to inflation.
- Investing in crypto has not got any barrier. The price of Bitcoin, presently while writing this article, is fluctuating between the US $53,000 to $59,000. The investors can even invest in smaller units, representing a fractional part of Bitcoin, known as Satoshis, where 1 Bitcoin=100,000,000 Satoshis. In addition, there are numerous altcoins which the investor can invest in, such as Etherum, which is currently trading at $4,600.
- Cryptocurrency has shown exponential gains over the past few years. For example, Bitcoin’s presently trading value of $58,000 indicates a rise of more than 7000% over the past five years. Similarly, Ethereum’s present value of $ 4,600 indicates a gain of almost 650% over the past year. Thus, the enormous gains of cryptocurrencies are proving to attract investors.
Cons of Investing in Crypto
- Besides having various advantages, cryptocurrencies have their own set of drawbacks. Cryptocurrency is a digital currency and thus a non-tangible asset as it cannot be touched or felt. It only exists in virtual form and is prone to cyberattacks. Since there is a lack of transparency, it is difficult to determine the actual value of a coin, and thus it can be traded at a value higher than its present worth.
- Investors are in no position of any passive cash flow by owning cryptocurrencies like the dividends in the case of stocks and rents in real estate investments. The only gain of owning crypto is via capital appreciation at the time of sale.
- There exists enormous volatility in the case of cryptos. For example, Bitcoin was down from $ 40,000 and was trading at below $30,000 on July 20th, 2021. Whereas, now it is up by 55.77% in the past six months, presently trading at $58,000. Such huge volatility makes it hard for risk-tolerant investors, as they become prone to losing their investment value while liquidating.
- Crypto is not regulated by the government and is yet to be mainstream. Therefore, any adverse rulings from the government are bound to decrease the value of the coins, as happened in China when it banned crypto trading a few years back.
Investing In Real Estate and Its Pros and Cons
Investments in real estate are an alternative investment to stocks and often act as an inflation hedge. There are various ways of investing in real estate, from wholesaling and house flipping to BRRRR investing and Real Estate Investment Trust (REITs). The National Council of Real Estate Investment Fiduciaries (NCREIF), in its released third-quarter 2021 report, has stated that the institutional real estate returns have been the highest in 15 years. The quarterly return was 5.23%, up from 3.59% from the previous quarter. This return is the highest since the return of 5.48% in the 4th quarter of 2005. The total return of 5.23% for the quarter consisted of 4.18% of appreciation and 1.05% of income. The NCREIF Property Index (NPI) for the third quarter of 2021 reflected the investment performance for 9,703 commercial properties, totaling $785 billion of market value. Many segments within the real estate sector are noteworthy for investment. One such segment is Multi-family commercial real estate (MFCR). Such properties are also known as apartment complexes and are buildings with multiple rentable spaces. Let’s see some of the benefits and drawbacks of investing in MFCR.
Benefits of Investing in Multi-Family Commercial Real Estate
- One of the prime advantages of real estates, such as in multi-family commercial, is that it is a tangible asset, and a value can be attributed to it. Moreover, since real estate is a basic necessity, the asset’s appreciation is always available. The improvements and renovations can result in higher rental yields and increase the asset’s value based on its net income.
- Multi-family commercial real estate can provide a passive source of income in the form of cash flows generated from monthly rents, which are enough to cover mortgage payments and all recurring expenses. In addition, the rents of such MFCR increase with inflation, thus providing a hedge against inflation.
- Multi-family commercial real estate generates consistent strong cash flows compared to other real estate properties. As a result, it is easier to finance as banks are likely to approve loans for such property.
- Multi-family commercial real estate is the best way of growing a portfolio as it consists of relatively large rental units.
- Owning a multi-family commercial real estate benefits the investors in several tax deductions.
Drawbacks of Investing in Multi-family Commercial Real Estate
- The major drawback of investing in large commercial real estate is liquidity. The asset class such as stocks and cryptos can be bought and sold relatively easily, but finding a buyer for real estate property seems pretty difficult.
- Real estate such as MFCR is costly to own. The barrier to entry is often its sizable cost, and even its maintenance cost is relatively high.
Comparison of Crypto and Multi-Family Commercial Real Estate on Various Aspects
Barrier to Entry
The barrier to entry is very low in the case of cryptos, as they can be bought and sold at relative ease. For example, presently, Bitcoin is trading at $58,000; however, the fractional part of Bitcoin, Satoshis, can be bought and sold even with a low one dollar investment. On the other hand, multi-family commercial real estate is costly, and thus, there is a sizable barrier to entry. Therefore, such an asset class is specially reserved for accredited investors, who have plenty of money to back their purchase investments. However, such barriers can be removed as investors can invest in such assets through Real Estate Investment Trusts (REITs) as they can purchase shares in these companies to gain access to such investment grade MFCR properties.
Liquidity is another comparison aspect between cryptos and multi-family commercial real estate. The volatility in cryptos can be largely attributed to its liquidity which has got sizeable buyers and sellers. Moreover, since cryptos can be traded in the fractional part, they have enormous liquidity, and exiting from an investment position is easier. However, liquidity seems to be a constraint in the case of multi-family commercial real estate, as accredited investors largely dominate the asset class. Hence, investments in such multi- family commercial real estate can be made through REITs.
An asset class is relatively volatile when it tends to fluctuate over a wide range in a short duration of time. Cryptocurrencies are the most volatile asset class. For example, the most popular cryptocurrency, i.e., Bitcoin, was below $30,000 on July 20th,2021, from $ 40,000 in just one month. Whereas, now it is up by 55.77% in the past six months, presently trading at $58,000. Thus, such huge volatility can put the investors in trouble at the time of liquidation as they can be prone to huge losses in their investment value.
On the other hand, multi-family commercial real estate provides stable returns and is not subject to volatility. For example, the institutional real estate returns for the third quarter of 2021 were 5.23%, up from 3.59% from the previous quarter. The stable return over a longer period makes it an “effective hedge” against inflation.
Investing in cryptos and multi-family commercial real estate have their own set of taxation rules. Investors are permitted for depreciation deduction for commercial properties over 39 years. Moreover, the commercial mortgage interest is eligible for deduction against federal income taxes. The property repairs, certain management expenses, maintenance costs, and other operating expenses are also eligible for deduction by multi -family commercial real estate investors. Further, the real estate losses can be taken as a tax deduction by the commercial real estate investors, making equal to or less than $100,000 a year.1031 exchange is another important tax provision where commercial real estate owners can defer their payment of capital gains to the IRS as long as they exchange their property within a certain period for another” like-kind” commercial property.
On the other hand, IRS Notice 2014-21 defines virtual cryptocurrencies as property, and any purchase made using the virtual currency is liable to be taxed as a capital gain. The taxable transactions include:-
(i) cashing out of cryptocurrency,
(ii)paying for goods and services using cryptos
(iii)exchanging two different cryptocurrencies
(iv) receiving mined cryptocurrencies.
Often, crypto transactions are taxed as short-term or long-term capital gains. However, the selling of mined cryptocurrencies is taxed as business income.
Investing in multi-family commercial real estate provides stable returns and acts as a hedge against inflation. Moreover, such an asset class carries less risk, and a value can be attributed to it due to its tangible nature. Besides that, it is less volatile and subject to various taxation benefits. On the other hand, cryptos are more volatile, and the value attributable to them is more of a speculative guess. Therefore, the only return while investing in cryptos is capital appreciation in contrast to commercial real estate, which offers passive cash flows. Hence, investing in multi-family commercial real estate seems to be a better way of diversifying the portfolio.