Last week we discussed how to buy real estate with Bitcoin and some of the risks involved in doing so.
Losing money during the interval between turning the Bitcoins into cash and closing escrow on the real estate purchase was the biggest risk.
Case in point: When we wrote our article last week a single Bitcoin was worth $17,640. As we sit down today to write, a single Bitcoin is worth $19,857 – a gain of almost 13% in the past seven days.
If you had sold 10 Bitcoins last week to fund the purchase of a rental property you would have received $176,400. Selling those same 10 Coins today would net you $22,170 more than just one week ago, meaning that you’ve actually lost money on the real estate purchase with Bitcoin!
Real Estate Backed ICOs
One way to avoid losing money by turning your Bitcoins into cash is to take part in an ICO backed by real property.
ICOs – or Initial Coin Offerings – are a form of group investing that use cryptocurrency rather than cash to raise capital.
Here’s an example of how they work, using a fictitious company created only for this example:
- Golden Real Estate LLC (GRE) wants to raise $100,000,000 to purchase investment real estate.
- The company gives investors 1,000 GRE tokens – also known as initial coins – in exchange for each cryptocurrency unit that the investor sends to GRE.
(Most ICOs accept a cryptocurrency called Ethereum, although some also accept Bitcoin and traditional currencies such as dollars, euros, or yen. Ethereum is currently valued at $800 per coin.)
- Once Golden Real Estate has received $100,000,000 in Ethereum, and issued 1,000 GRE tokens in exchange for each Ethereum unit received, GRE looks for real estate to buy.
- Investors in Golden Real Estate who hold the GRE tokens make money on their share of the income produced by the real estate purchased, and the potential appreciation of both the real estate and the GRE tokens.
Or at least on paper they do.
Problems With ICOs And Real Estate
Sounds good, right?
Getting cash flow from the real estate purchased, plus appreciation on the real property asset, plus appreciation on the GRE tokens.
But if something sounds too good to be true it usually is.
Before investing in an Initial Coin Offering backed by real estate, speculators investors should always ask three questions:
- Who are these guys?
Their website looks nice and professional, but do they actually have any experience investing in income producing real estate? Or are they nothing more than crowd funding gurus who are good at convincing people to give them money?
- What real estate are they going to buy?
What kind of income producing real estate are they going to buy, and at what price? Office, industrial, retail, single-family, or multi-family? In Los Angeles, New York, Paris . . . or Venezuela?
- Where are these guys?
Just like cryptocurrencies such as Bitcoin and Ethereum are virtual, companies conducting initial coin offerings can be virtual as well, existing only on the world wide web. Potential investors should understand that the majority of ICOs are unregulated by any government oversight.
Next week – as you start planning for the New Year ahead – we’ll talk about a way to safely use Bitcoin to invest in income producing real estate.