Why the Crypto-Rich Are Buying Real Estate

TOFAfter the 2008 financial crisis, high school student Hank Wu traveled with his parents every weekend to places like Las Vegas and Florida to search for investment properties.

In high school, he found a new and more exciting investment opportunity: cryptocurrency. He invested heavily and made millions thanks to the meteoric rise of Bitcoin and lesser-known currencies like Tether.

Since then, he has sold about 80 percent of his crypto portfolio, putting his earnings in other investments, such as supporting startups and, increasingly, buying real estate.

In 2018, Wu bought seven garden-style rental units in West Palm Beach, relying on his parents for their expertise. Now 24, Wu is about to close another real estate purchase: a condo in Manhattan.

During the pandemic, he signed a contract for a one-bedroom unit at Madison House, a Fosun and JD Carlisle project under construction at 15 East 30th Street in Manhattan, for $ 1.8 million. He paid in cash, funds he wouldn’t have had if it weren’t for his teenage crypto gambling.

“In the back of my mind, I had this implicit understanding that you should always invest in real estate,” Wu said. “I can trust that it won’t go to zero.”

Wu is one of many who have made millions from cryptocurrencies and are now looking to park their crypto riches in the most stable and tangible real estate asset class. With huge spikes, cryptocurrencies have minted thousands of millionaires. Almost 80,000 Bitcoin addresses have more than $ 1 million each, according to data from BitInfoCharts. From New York and the Hamptons to Miami and Los Angeles, crypto wealth is being injected into luxury real estate, according to crypto brokers, buyers and fund managers.

For many, the volatility of cryptocurrencies is attractive, as is the potential for colossal riches.

“People are thinking, ‘What can I spend a penny on and earn a million dollars?’” Said Piper Moretti, who founded Crypto Realty Group.

Now some people are using their new dough to achieve long-term goals: making a down payment on their new home, buying a third home in Miami, or buying a private jet or exotic car. Others are discovering ways to balance their portfolio, protecting their net worth from the notorious volatility of cryptocurrencies and opting for assets with more predictable cash flows, such as multifamilies.

Whether these people convert cryptocurrency to cash for investment or use Bitcoin directly to buy property, sellers, fund managers, brokers, and lawyers must adapt and learn new ways to close real estate deals.

Bitcoin hedging

James Keogh, a broker for Douglas Elliman in the Hamptons, recently purchased a new four-bedroom home at 73 Cross Highway to Devon in Amagansett for $ 2.1 million. After putting in 10 percent in cash, he converted $ 250,000 into Ethereum to pay another 15 percent at closing.

“If I had sold it a week later, it probably would have cost $ 400,000,” Keogh said of his stash of Ethereum, which he started amassing after watching videos about its potential on TikTok. “But he needed the money.” Keogh’s earnings were classified as short-term capital gains and were therefore subject to higher tax rates.

Over the past year, cryptocurrencies like Bitcoin, Ethereum, and Dogecoin have seen explosive and unprecedented growth. Bitcoin jumped a staggering 800 percent from April 2020 to a high of $ 63,000 on April 15. But it has been a turbulent journey. In late May, the price of a coin dropped to $ 34,000.

By comparison, prices for multi-family and industrial properties, the two strongest real estate asset classes in 2020, increased by 8.8 and 8.3 percent, respectively.

“Traditionally, real estate has been a good place to park your money,” Keogh said. “With interest rates as low as they are, it is becoming a no-brainer for people who have made 100 percent of their money through cryptocurrencies.”

For those who have built a significant crypto portfolio, “the right thing to do is take some of that money off the table and diversify,” said Matthew Hougan, chief investment officer at crypto asset management firm Bitwise. “Selling some of your cryptocurrencies to buy a house, or diversifying your portfolio to include more stocks and bonds, is a very good thing.”

No cash, no problem

As cryptocurrencies generate more wealth, residential brokers have a larger pool of interested buyers.

“We advertise households that accept cryptocurrencies, and for that alone, we’ve received multiple calls from billionaires in the crypto world that we didn’t have access to before,” said Aaron Kirman, a Los Angeles-based luxury agent at Compass. “People like options.”

Kirman is listing a 9,000-square-foot property at 777 Sarbonne Road in Bel Air in the name of famed plastic surgeon Alex Khadavi for $ 87.8 million, and the Bitcoin deals will be entertaining.

But it’s not just LA’s lavish spreads that are available to buyers hoping to use crypto. In Manhattan’s financial district, former WeWork growth director David Fano is selling his penthouse at 130 Beekman Street. “Buy for 88 Bitcoin or $ 3.29 million!” read a recent listing by Rachel Glazer from Compass.

In some cases, bullish sellers on cryptocurrencies are offering sweeter deals for buyers bidding on crypto. A 7,310-square-foot home at 358 Crescent Avenue in Wyckoff, New Jersey, is trading for $ 3.9 million. But if an offer is made to buy the house with crypto, the seller, who according to the records is financial analyst Timothy Brackett, will eliminate $ 50,000.

The most common way to buy a house with cryptocurrencies is to convert it into US dollars at an agreed exchange rate.

Buyers and sellers can set up the transaction through the BitPay payment processor, according to Shaun Pappas, a partner at the law firm Starr Associates who has worked on such settlements. The seller generates an invoice and the buyer has 15 minutes to set a rate to convert the currency to cash. Once executed, the cash is placed in an escrow account, similar to a normal property transaction.

In other cases, buyers may have the option to transfer their cryptocurrencies directly to the seller without exchanging them for cash, a wallet-to-wallet transaction. Although this is less common, it could lead to higher profits for sellers.

Los Angeles-based developer Michael Chen wanted to give potential buyers this option by listing a spec home at 1108 Wallace Ridge in Beverly Hills for $ 65 million. With a wallet-to-wallet transaction, a $ 65 million home could halve or double in value overnight, depending on where the coin is located. But Chen is willing to take the risk.

“I don’t see it as just a coin,” Chen said. “I see it as an investment.”

Those who use Bitcoin to buy property can end up with a kind of 21st century buyer’s remorse.

Madison House at 15 East 30th Street

In February, investor Chamath Palihapitiya tweeted a photo of a Lake Tahoe parcel that he had bought in 2014 with Bitcoin. The deal was valued at $ 1.6 million at the time, but Palihapitiya tweeted that if he had held onto the cryptocurrency, it would have been worth $ 128 million. “#FML”, he wrote.

Anonymous no longer

When Keogh showed his mortgage broker at Bank of America – “not a crypto person,” he said – that he had cashed in his crypto earnings to use as part of the down payment, the broker objected.

Keogh tried to explain that it was like a brokerage account, “like trading stocks.” Bank of America eventually relented and Keogh got a mortgage.

“I think the bank’s concern is that they don’t necessarily know where the money is coming from,” Keogh said.

Anonymity is a central issue when it comes to cryptocurrencies – wallets and addresses don’t have to have identifying details, making it difficult for banks, brokers, and lawyers to verify owners.

“We do our due diligence,” Chen said, adding that someone who can afford a $ 65 million home likely has a financial background that can be scrutinized. “We just want to know that they are doing this legitimately without breaking the law.”

But as cryptocurrency trading becomes more common, anonymity is something that crypto users may have to give up if they want to buy property.

Banks need to know where cryptocurrencies are coming from and identify the buyer, Pappas said. In some ways, this “defeats the purpose” of crypto, which was built around anonymous transactions, he noted.

Just a lamborghini

Similar to Hank Wu’s debut deal, others who have made money in crypto are also considering rental properties that flow in cash as investments.

Keith Wasserman, co-founder of multi-family investment firm Gelt, said he is seeing more and more investors who have realized the gains from cryptocurrencies participate in his fund.

“It’s like the bar approach,” he said, referring to the investment strategy of betting on the two extremes of high-risk assets and those with predictable cash flows, avoiding options in between.

Some investors use their crypto wealth to achieve the long-term goals of owning a property, while others want to cash in on their real estate assets and stake everything on cryptocurrencies, according to Nicole DeCicco, founder of CryptoConsultz. The firm helps educate crypto investors on how to diversify their portfolios.

Others think it is too early to sell Bitcoin, are skeptical of investments that are not decentralized, or like to follow the investment advice of Tesla CEO Elon Musk.

“People with more investments, they’re not buying property,” said Stephan Burke, a Miami-based Elliman broker who has closed wallet-to-wallet and crypto-to-cash deals since 2017. “They want to sit down on crypto and see what happens. “.

Angel investor and crypto fund founder Terrence Yang hates owning real estate and hasn’t made any purchases since entering Bitcoin.

“It is not liquid,” Yang said. “It’s easy for the government to raise taxes.”

“No, just a Lamborghini,” said independent venture capitalist Peter Saddington when asked if he had bought real estate since making money from crypto. He bought the supercar in 2018 for 45 Bitcoins, which he had bought years before for less than $ 115. A single Bitcoin was trading at $ 30,000 at the time this story went to press.

Wu is driven more by the turning of the key on a new property than by the revs of an engine. Although he has no other crypto-backed real estate deals in the works, he keeps his eyes open for more residential investments.

Because, as Wasserman said, we all need a place to live, “until we’re living on Mars with Elon.”

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