If you travel back in time and ask any member of the Medici, Habsburg, or Fugger families how they preserved their wealth over many generations, the common reply would be: art, gold, and real estate. These three assets have survived government upheavals, wars, and economic collapses.
Real estate in particular has been regarded throughout human history as a way to preserve wealth over time, hedge against inflation (or if financed properly, to profit from inflation), and endure the ebbs and flows of history’s turmoils. An open field of land can endure movements of military troops. A productive structure like a building can provide utility during a hyperinflationary period.
Real estate is unique from other assets in that it offers a practical use case as rental property to generate income that can liquidate debt on its own and provide additional cash flow for an owner. Additionally, most countries provide favorable tax treatments for real estate that enhance its profitability.
One can also forcibly drive up the value of a property by implementing certain improvements to a structure: an additional bedroom or bathroom can be added; new appliances installed; a new roof can be added. These improvements can drive up the valuation of a property through what we call in the US “Forced Appreciation”.
It has been prudent to allocate toward real estate a significant percentage of a portfolio as it offers benefits that other assets cannot provide. However, real estate has its negative qualities: I cannot pack up my properties and move to a different part of the world with them. I cannot control who enters elected offices of local and state governments (which can implement policies that harm my assets). I also cannot control how property taxes are envisioned and implemented toward my portfolio. There are significant factors that can impact the viability of my real estate investments and some in particular are important to highlight, especially when weighed against Bitcoin.
There is a reason why many real estate investors have been drawn to Bitcoin since its emergence in 2009. These investors were already keenly aware of the detrimental effects of inflation, the woeful state of the world’s financial ecosystem, and the benefits of allocating resources toward hard assets (ie, assets that are scarce and based on a tangible object). Increasingly, real estate investors are embracing Bitcoin as a complement to their real estate portfolio. Investors can direct their portfolio’s cash flows toward accumulating Bitcoin and likewise extract equity from properties to convert that equity into Bitcoin. I refer to this as “Equity Stripping” and I see it as a way of shielding the equity from the risks that real estate encounters in the present day. I’d like to highlight two of these risks and how they make Bitcoin’s superior features explicit: Property Taxes and Judicial Lethargy.
If you really want to know who truly owns your real estate, then stop paying your property taxes and see what happens. You’ll receive letter upon letter (with increasing urgency) warning you that if you don’t pay your property taxes then your local municipality will foreclose on your property and you will lose it. Holding true and unencumbered ownership of real property is very much diminished when you consider the impact that taxation has on your property.
This becomes important in a time like the present when governments have rapidly debased currencies (such as the US increasing 40% of its currency supply in 2020 alone). As currencies diminish in value, the price of assets increases proportionately: asset prices increase generally at the pace the money supply increases. While it feels great to see the value of a property increase, it’s important to remember that the property likely isn’t improving by 40%, but rather that the currency denominating the asset is devalued by 40%.
This all becomes critical when considering the property taxes levied on a piece of real estate. The rate at which the taxes increase can often be disproportionate to the rate by which rents increase, leading to property owners becoming “squeezed” and pressured by the constraints. Add to this the presence of “The Almighty Assessor” - the bureaucrat who inspects your property annually and writes on their clipboard how certain features of the property demand increases to the assessed value, which increases the taxes you’ll pay. Their methods for assessing valuations can often be vague and difficult to understand and any means toward lowering these assessments through arbitration are “kafka-esque” and mired with so much paperwork that it is not worth pursuing. A property owner then faces paying the higher taxes, selling the property, or if it cannot sell in a timely manner facing the loathsome prospect of property foreclosure.
This presents an opportunity for governments to confiscate property through blatant seizure (but they are legally enabled). The property tax system can allow governments to increase property taxes so rapidly and so unsustainably for property owners that they are left with no other choice but to surrender their property to a government. This could very easily be done during a period of significant inflation when property values rise quickly.
Here is a critical use case for Bitcoin and particularly Bitcoin held via a self-custody method. When self-custodied, Bitcoin cannot be confiscated. No one can access your Bitcoin without knowing your keys. No tax assessor will harass you about higher assessments and thereby demand higher taxes owed.
This not only shields you from the risks of uncontrollable decisions made by bureaucrats with clipboards but also (and perhaps equally important) it saves an investor the headache and difficulty of dealing extensively with a tax bureaucracy. Denominating wealth in Bitcoin as opposed to real estate presents a simpler, safer, and more efficient way of storing wealth over a period of time.
Of course, this doesn’t mean an investor must choose either Bitcoin or real estate: both are compatible in an investment strategy together (which I advocate for). When extracting value from your real estate investments (for example, my Equity Stripping method mentioned earlier), an investor is protecting that wealth from the risks imposed by property taxes. One does not need to dispose of a property entirely, but rather divert the proceeds of that asset to a different allocation like Bitcoin.
Yet, there is one additional risk I’d like to highlight in addition to property taxes: the slow movement of the judicial process in many governments. I’ll explain more.
Real estate investments are also subject to risks imposed by the judicial system in many states and local municipalities.
If a tenant fails to make required rent payments, eviction is needed. This is to be avoided at all costs given the negative impacts for both the investor and the tenant. However, eviction is necessary in order to preserve the property rights of the property owner.
In the US, in order to evict a tenant a property owner must file for eviction through the municipal court system. Typically this involves hiring a lawyer (expensive!), waiting for the judgement to be made by a judge who grants the eviction (this can take months), and then a member of the local law enforcement must serve the eviction and oversee the process of getting the tenant out of the property. Each stage of this is time consuming and prone to delay and during this process a property owner must keep the property maintained and any financial obligations must be covered.
What is particularly difficult is the prolonged response on the government’s side in regard to its role in the eviction process. It is often what I describe as “Judicial Lethargy”: a delay in court proceedings or no timely communication from law enforcement on scheduling the eviction. Similar to the property tax regime, it creates a maze of bureaucracy for the property owner to navigate. When this happens in the US, it is not uncommon for a tenant who has failed to pay rent to occupy a property for more than a year without any eviction action taking place. This creates such a strain on the property owner that they either have to endure the burden of maintaining the property indefinitely until relief is granted or they surrender the property to their lender and walk away. This happens not only with nonpaying tenants but also squatters who illegally occupy properties without the knowledge of an owner.
This is a type of confiscation that governments can implement over your property and it destroys any gain an investment property might have achieved prior.
Again, here is where Bitcoin shines over real estate.
Bitcoin cannot be seized by governments (when self-custodied). Bitcoin can’t be illegally held by someone else against your will. Bitcoin isn’t subject to lengthy unresolved judicial processes.
By converting your property’s equity to Bitcoin, you’re shielding that wealth from the risks of Judicial Lethargy and from the negative impacts of lengthy eviction processes that will otherwise ruin an investment.
As I mentioned above, an investor does not need to choose “Either/Or” but can rather pursue “Both/And” when it comes to real estate and Bitcoin. Both are complementary and have features that are mutually beneficial toward each other. For example, Bitcoin is ideal collateral that can be borrowed against to acquire more real estate. Likewise, real estate is an income-producing asset that can enable the accumulation of additional Bitcoin. Together, the two can create a virtuous cycle of wealth building that further reduces the risk exposures to rising property taxes and lengthy judicial processes.
The ability to mitigate risk by converting a property’s equity and income into Bitcoin is an underappreciated, simple, and cost-effective method of preserving your wealth and shielding it from the very real and present risks property owners face.
Jonny Reck is a real estate investor, venture partner, and Bitcoin advocate. He owns a nationwide portfolio of properties in the US and also helps scale companies he invests in, the popular video platform BitChute being one of them. Jonny discovered Bitcoin in 2021 and was drawn to the ultra-scarcity of Bitcoin’s 21 million supply. He is also developing a private fund that merges Bitcoin with real estate investment known as Maslow Properties.
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