Technology is changing the world around us faster than ever before. An area where significant advancements have been made in the last few decades is payment processing. Great strides were made moving from cash to card, from physical payments to digital payments, and from desktop to mobile. Cryptocurrency appears set to be the next major leap in that evolution. And while real estate has been historically slower than other industries to adapt to innovation and disruption, changes are still occurring. From general real estate transactions to the rental market, cryptocurrency has the power to alter the way many landlords do business.
Cryptocurrency (‘crypto’ for short) not only impacts the way that payments are made, but also the way information is stored and validated. Cryptocurrency transactions, exchanges, and technologies have been steadily on the rise, and, should it continue growing at its current pace, crypto will affect the way business is done for property managers and investors. It’s certainly too early to speak definitively about the ways in which those changes will occur, but a basic understanding of how cryptocurrency works – particularly within the context of real estate – can be revealing. This article will explore the following:
- A background into how cryptocurrency works
- Its current usage in real estate transactions and rental payments
- The benefits and drawbacks of accepting crypto as a landlord or property manager
Should it continue growing at its current pace, crypto will affect the way business is done for landlords, property managers and investors.
Cryptocurrency at a Glance
This great guide from Blockgeeks will dive into cryptocurrency at a much deeper level than we’ll get into, and we encourage you to check it out. For the context of this article, we’ll just go over some essentials:
What is cryptocurrency?
Simply put, cryptocurrency is a virtual, internet-based currency used to purchase goods or services digitally. It exists exclusively online (no physical coins, cards, or paper involved), though you can exchange crypto for traditional, government issued currency (also called fiat currency), and vice versa. There are many different cryptocurrencies. Bitcoin is the most widely recognized. Others include Ethereum, Litecoin, and Monero.
Why does it exist?
Unlike traditional currency, which is issued and regulated by the government, crypto is built on a decentralized peer-to-peer network. In other words, transactions are made directly from one person to another without influence or regulation from external forces. They don’t go through banks, brokers, or any third-party intermediaries. This is often where people start to get lost, so let’s take a step back for a moment.
A long, long time ago, people exchanged goods for other goods. In a bartering system, I’d give you two cows and a pig for your stores of wheat. This was fine enough, but it created some challenges. For one thing, prices weren’t consistent. My two cows and a pig may be sufficient for you on Monday, but a different wheat farmer or a different day may result in a radically different price. Secondly, there were too many quality variables. It’s one thing to look at my livestock and determine a price, it’s another thing to then translate that price into bushels of wheat. And finally, you might not want my cattle. To get wheat, I’d need to find another wheat farmer to trade with, or trade my livestock for something else you would want. These challenges resulted in less trade and less economic growth. In an effort to increase trade and simplify the exchange of goods, humans created various forms of currency that were universally accepted within a market or community in place of those goods.
Currency solved many of the problems of the bartering system, but it introduced a new one of its own – trust. How are you to trust that my coins are worth two bushels of wheat? And how do you know anyone else will accept those coins? To overcome the trust problem, governments and rulers started printing their seal on currency to prove its worth. Banks sprang up to store the value and to record how much money people had in their accounts. Governments and banks thus became the keepers of currency. Now, when I try to buy your wheat, you don’t need to trust that I have money on my card, instead, the bank tells you. We’ve deferred our trust from each other to third parties, and for the most part, it makes sense.
But this reliance on centralized financial institutions has its drawbacks. Moving between currencies, particularly from one country to another, can be extremely challenging (and as a result, expensive). Even moving money from bank to bank within your own country can be slow as multiple financial institutions need to communicate with one another and verify information. Fees can be substantial for some transactions and you never truly control your money (the bank does).
Cryptocurrency, as the next major development in payments, aims to solve these problems. Every account that holds cryptocurrency has a unique name (it’s a big string of numbers and letters), and whenever a payment is made, a debit is added for one account and a corresponding credit is added for another.
How does it work?
To ensure cryptocurrency transactions are trustworthy, each of these transaction records are linked together using cryptography (a method of encryption to secure information) and stored in what’s called a blockchain. You may have heard the word blockchain before, and it’s an essential technology for cryptocurrency, but we won’t go too far into that rabbit hole for this article. Just know that for each new batch of transactions, another block is added to the blockchain and that these blocks, for all intents and purposes, are absolutely immutable – once a transaction is recorded, it cannot be changed. If you add up all the credits and debits on an account, you’ll get the account balance and, as a result, the blockchain can tell you exactly when a transaction occurred, how much that transaction was for, and, instantly, if an account has enough money in it to make another transaction. Instead of a bank verifying that you have $5 to buy your morning cup of coffee, payments are verified across a network of computers that check the ledger, confirm amounts, and vote to allow the transaction to proceed.
Who is using it?
Here are some quick statistics regarding crypto usage and behavior:
- Studies have indicated anywhere from 5-8% of Americans have invested in cryptocurrency at some point. Interestingly, this places the US outside of the top 10 countries with the highest percentage of crypto users.
- A study from the London Block Exchange found that, of Millennials who aren’t currently investing in crypto, 28% were at least seriously considering doing so within the year.
- Bitcoin usage is gaining popularity in many economically unstable areas around the world, especially in South American and African countries.
- Fortune reports that 71% of American crypto users are male, and nearly 60% fall between 18 and 34 years old.
- There are now nearly 44 million blockchain wallet users worldwide, over half of which came after 2018. (A blockchain wallet is a digital wallet used to manage cryptocurrencies.)
- Generally, over 300,000 confirmed Bitcoin transactions are made each day.
- Chainalysis found that most Bitcoin users were long-term investors, holding onto their currency for the future. Only about a third of users actively make day-to-day transactions.
The Impact of Cryptocurrency & Blockchain in Real Estate
Even in their infancy, cryptocurrency and blockchain technologies have had a significant impact in multiple industries. Real estate is no exception. Real property investment has seen most of that impact already, but property management serves as a major opportunity for growth. We’ll explore the role of crypto and blockchain in both situations, as well as the risks associated with them.
Real Estate Investment & Acquisition
Real estate has historically been an offline, face-to-face industry. But increasingly, that’s changing. Crypto and blockchain are currently being used to purchase everything from condos to luxury mansions. What’s more, some realtors and buyers are even beginning to record their deeds on the blockchain. Particularly in developing countries where property ownership record keeping offers unique challenges, the immutable blockchain has been viewed as a way of bringing confidence to clerical data. Here are the biggest impacts from this new wave of real estate investment:
#1 – Faster, Cheaper Transactions
Above all else, crypto and blockchain enhance the speed and efficiency with which transactions can occur. The lack of intermediaries means less middlemen to go through, and less processing time as a result. Transferring bitcoins from one digital wallet to another can take less than 10 minutes. And after those 10 minutes are up, the funds are guaranteed as they’ve already been verified by the network.
Because cryptocurrency’s peer-to-peer payment method bypasses the need for banks, lawyers, and brokers, the fees associated with those services are dissolved as well. At high volumes, these costs can accumulate quickly, so the savings blockchain offers are significant.
#2 – Borderless Investments
Assuming it isn’t banned by its respective government, cryptocurrency can be used anywhere in the globe. It doesn’t need to be converted from one currency to another. This is a substantial benefit for foreign investors who are limited by unfavorable exchange rates or federal regulations.
For instance, China has been enforcing capital controls banning overseas investments in a variety of industries, including real estate. Chinese investors make up the largest share of foreign investors in US commercial real estate, so the legislation has had a sizeable impact on money flowing in. In order to continue investing in the US, Chinese investors have switched to using cryptocurrencies. Unlike traditional Chinese currency, crypto can’t be regulated by the Chinese government.
#3 – Verified, Real-Time Information
Blockchain is built on keeping information transparent – something real estate has struggled with in the past. Forbes states that “Blockchain can make MLS property data more centralized & accessible [and] title records easier to track and transfer”. While sites like Zillow have already helped bring similar data to the public, blockchain allows for improved accuracy and speed in reporting (which have been common shortcomings in Zillow). In fact, Imbrex, a blockchain-powered real estate listing service, claims that their listings “[are] not limited by geographic or political boundaries and features listings anywhere in the world, often before they go to existing Portals or MLSs”.
#4 – Affordability through Tokenization
One of the advantages of blockchain is tokenization. Alphapoint defines tokenization in real estate as “the process of creating a digital asset that represents a single property or a portfolio of properties on a blockchain-based system.” In other words, possessing a token represents a share of ownership in the asset associated with it. Property owners can split their assets into tokens, allowing for fractional ownership. Investors can purchase as many, or as few, issued tokens as they wish. Because the entire property does not need to be purchased altogether, it becomes more affordable for users to obtain equity and diversify their real estate investments. Once their tokens are obtained, they can be resold on the open market via secondary trading. This makes liquidity in real estate assets easier to come by as well.
One of the most popular recent examples of tokenization is the investment opportunity presented by the St. Regis Hotel in Aspen, Colorado. Elevated Returns, a digital asset management firm, sold off 18.9% ownership in the St. Regis for $18 million in digital tokens. Investors were able to obtain stake in the hotel for the equivalent of $10,000 in tokens – a reasonable cost for a hotel valued at over $95 million.
While the use of cryptocurrency and blockchain is less developed in property management, there are two major areas for innovation to occur – leasing and rent collection.
#1 – Leasing with Smart Contracts
Smart contracts can enhance property management at each stage of the leasing process.
Enabled by blockchain, smart contracts are a way of digitally enforcing an agreement between multiple parties. They operate in an “if-then” fashion. (e.g. If you pay your security deposit, then you will be given access to the property.) A pre-determined condition must be met before the resulting action can take place. Only then will the contract be executed. Once those conditions are fulfilled, the action cannot be prevented by either party.
To see how smart contracts would work in property management, we’ll paraphrase the following scenario provided by Codebramha: Let’s say a landlord initiated a smart contract with their tenant. The landlord agreed to provide the key code to a rental unit as long as the first month’s rent was paid by a given date. The two conditions of the smart contract would be 1) the paid rent, and 2) the date the payment was made. The contract ensures that if and only if both conditions are met, will the key code be transferred. The landlord cannot prevent the transfer of the key once the rent is paid, and the key cannot be transferred prior to the rent payment. Smart contracts are publicly recorded (with the identities kept anonymous), so neither party can accuse the other of any wrongdoing.
Because any information of the property is linked together on the blockchain, details in the smart contract can also be linked directly to rent payments. They can be setup so the rental amount (or any fees) specified in the contract is automatically deducted from the tenant’s account each month. Landlords can easily become lax in enforcing traditional contracts, and tenants can take advantage of this. Using a smart contract strictly enforces payments, keeping renters liable. This reduces the likelihood of late payments, and ensures that any fees for late payments are collected if necessary.
#2 – Collecting Rent with Cryptocurrency
The acceptance of cryptocurrency as a rent payment is one of the biggest opportunities for innovation in the rental market. Though it likely won’t come into fruition for years to come.
While crypto-based rent collection is happening, there aren’t many property managers accepting it. Cash and checks still have a strong grip on the industry, and even the adoption of online payments via debit, credit, and ACH (eCheck) have been slow. Furthermore, based on a small sample of landlords (via BiggerPockets Forum 1 and Forum 2), it’s evident that most people just aren’t confident in it (yet!) from a rent collection perspective. Many cite crypto’s volatility and limited history as their major concerns. There are both advantages and disadvantages to accepting cryptocurrency as a property manager, but it’s simply too early to say whether or not doing so will pay off.
Cyptocurrency is still in its early stages of development. Many industries are unsure what the extent of its impact will be. For real estate investors, crypto and blockchain have already provided new opportunities for acquisition and sale of property. In the rental market, blockchain has had an influence in the form of smart contracts, but the success of cryptocurrency remains to be seen. Only time will tell whether crypto as we know it is the rent collection method of tomorrow, or the precursor to something bigger.