Recently, I had an interesting conversation with a business associate about leveraging investments in real estate and Bitcoin.
He offered me an opportunity to purchase an apartment in Tbilisi using a bank loan with a 10-year term, requiring a 30% down payment. This essentially creates a leverage ratio of 3x. The idea is to rent out the apartment, which would cover the mortgage payments, a common and popular belief among real estate investors. While I'm not advocating against this approach, it got me thinking about how it compares to leveraging investments in Bitcoin, where the leverage can be significantly higher.
As the founder of a successful crypto hedge fund, Terramatris, I often explore various investment strategies. This particular offer in Tbilisi, a market I am quite familiar with, prompted me to compare real estate with Bitcoin investments. Although in the crypto market, leverage can go up to 10x, for a fair comparison, I will apply the same 3x leverage to both real estate and Bitcoin investments. Let's break down the numbers and see which investment strategy might be more profitable under similar conditions.
Real Estate Investment
Assumptions:
- Property Value: $200,000
- Down Payment: 30% ($60,000)
- Loan Amount: $140,000
- Annual Interest Rate: 6%
- Rental Income: $1,200 per month
- Annual Property Appreciation: 5%
Calculations:
- Monthly Mortgage Payment: Using a mortgage calculator, the monthly payment for a $140,000 loan at 6% interest over 10 years is approximately $1,554.
Annual Rental Income:
$1,200 \times 12 = $14,400
Annual Mortgage Payment:
$1,554 \times 12 = $18,648
Net Annual Cash Flow:
$14,400 - $18,648 = -$4,248
The rental income does not cover the mortgage payments, resulting in a negative cash flow.
Property Appreciation:
$200,000 \times 1.05 = $210,000 \text{ (after 1 year)}
Annual appreciation adds $10,000 to the property's value.
Bitcoin Investment
Assumptions:
- Investment Amount: $200,000
- Down Payment: 30% ($60,000)
- Total Exposure: $200,000 (3x leverage)
- Annual Interest Rate on Loan: 6%
- Annual Bitcoin Appreciation: 5%
- Monthly Income from Covered Calls: $X (To be calculated)
Calculations:
Annual Interest Payment:
$140,000 \times 0.06 = $8,400
Bitcoin Value Appreciation:
$200,000 \times 1.05 = $210,000 \text{ (after 1 year)}
Annual appreciation adds $10,000 to the Bitcoin's value.
Covered Calls Income: This depends on the strike prices and premiums received. For simplicity, let’s assume a 2% monthly premium on the $200,000 investment.
$200,000 \times 0.02 = $4,000 \text{ per month} $4,000 \times 12 = $48,000 \text{ per year}
Net Annual Income:
$48,000 - $8,400 = $39,600
This income from covered calls is significantly higher than the interest payment.
Comparative Analysis
- Real Estate:
- Negative cash flow of $4,248 annually.
- Property value appreciation of $10,000 annually.
- Total gain (or loss) after one year: -$4,248 + $10,000 = $5,752
- Bitcoin:
- Positive cash flow of $39,600 annually.
- Bitcoin value appreciation of $10,000 annually.
- Total gain after one year: $39,600 + $10,000 = $49,600
Potential Downsides
Real Estate
- Repairs and Maintenance:
- Unexpected repairs can be costly and frequent, impacting net income.
- Regular maintenance to keep the property in good condition.
- Property Management:
- Hiring a property manager can cost around 10% of the rental income, further reducing cash flow.
- Time and effort required if managing the property yourself.
- Vacancy Rates:
- Periods when the property is not rented out can result in a loss of rental income.
- Marketing and tenant acquisition efforts can be time-consuming and costly.
- Market Risks:
- Real estate markets can fluctuate, impacting property values.
- Economic downturns can reduce rental demand and property appreciation rates.
Bitcoin
- Volatility:
- Bitcoin is highly volatile, and prices can swing dramatically in a short period.
- The value can drop significantly, potentially even to zero, resulting in substantial losses.
- Security Risks:
- Risk of hacking and theft if not stored securely.
- Exchanges can be vulnerable to cyberattacks.
- Regulatory Risks:
- Changes in regulation can impact the value and legality of Bitcoin.
- Governments may impose restrictions or bans on cryptocurrency trading.
- Market Liquidity:
- While generally liquid, large sales can impact the market price.
- In extreme market conditions, liquidity can dry up.
Conclusion
Based on these simplified calculations, leveraging Bitcoin appears to offer a significantly higher return compared to investing in real estate under the given assumptions, even when both investments use the same 3x leverage. The income generated from covered calls and the appreciation of Bitcoin value far exceed the returns from rental income and property appreciation in the real estate example.
However, it’s essential to consider the volatility and risks associated with each investment type. Real estate tends to be a more stable and predictable asset, while Bitcoin is highly volatile and can result in significant losses as well as gains. Additionally, real estate investments come with their own set of challenges, such as repairs, property management, and vacancy risks, whereas Bitcoin investments are susceptible to market volatility, security risks, and regulatory uncertainties.
As always, it’s crucial to conduct thorough research and consider your risk tolerance before making investment decisions.