Cryptocurrency and real estate are both investments that could help you build the wealth you need have a comfortable retirement. As with most types of investments, each comes with a set of unique advantages and disadvantages.
How does cryptocurrency compare directly to real estate? How should you use them in your retirement plan?
The Twin Priorities of Retirement Investing: Wealth Accumulation and Income Generation
Retirement investing is a somewhat vague phrase, since it can refer to both investing for retirement and investing in retirement. However, since both of these concepts are important, we will continue using this phrasing.
With both of these perspectives in mind, we can establish twin pillars of retirement investing priorities: wealth accumulation and income generation.
The first goal is to accumulate wealth for a retirement nest egg. The second goal is about using that wealth in a way that allows you to meet all your expenses and live a comfortable life. You may retire with $2,000,000 in the bank, but if you don’t generate income from that principal, you could end up spending it all prematurely.
In the priority of wealth accumulation, you’re going to be focused on steady, consistent growth. You need assets that can perform consistently and help you multiply your total wealth.
In the priority of income generation, you’re going to be focused on value preservation and the production of consistent income. You need a reliable stream of revenue to address your needs.
We will be evaluating both cryptocurrency and real estate for these priority pillars.
An Introduction to Real Estate
Real estate investing is all about buying, managing, and selling properties. There are many potential strategies that can guide you here. First consider if you want to invest in commercial real estate or residential. If residential, do you want single family homes or multi-family homes? Some investors “flip” properties to turn quick profits in rapid succession, while others attempt to hold properties as investment assets so they can generate more consistent revenue over time. Which option sounds better to you?
If you’re averse to risk, you might attempt to purchase only the safest properties, even if it means a potentially lower return. If you want to grow quickly and don’t mind some bumps along the way, you can pursue a much more aggressive strategy.
As you dip your toe into real estate, lean on those who have gone before you. They can offer hard earned advice and give you direction when needed. They can also stand up for you.
For example, if you’re a minority and you’re concerned about the possible effects of racial discrimination in the real estate world, you can seek a Black real estate agent to help you select an ideal property for your needs – and feel comfortable doing it.
A single real estate purchase is unlikely to assist your retirement much, so most investors diversify their real estate portfolios with multiple different holdings in different areas.
An Introduction to Cryptocurrency
Cryptocurrency is a type of digital currency that depends on and utilizes blockchain technology. A “blockchain” is a kind of distributed ledger, shared by all the users of the system, that keeps record of transactions and securely links those records together with the help of cryptographic hashes.
The technology creating the infrastructure for cryptocurrency is much more complicated than cryptocurrency itself. Most cryptocurrencies are designed to be highly secure, decentralized and insulated from the influences of central banks, and both inexpensive and easy to use. There are many types of cryptocurrency, each of which has distinctive features, but Bitcoin is arguably the most popular and the closest to being mainstream.
It’s important to remember that cryptocurrency is designed to be a currency, not necessarily an investment. But you can invest in cryptocurrency as a speculator, counting on the value of each coin in the currency to increase with time.
Pros and Cons of Real Estate for Retirement Investing
Why is real estate valuable for retirement investing?
Pros of Real Estate Investing
Potential for Financial Leverage
Real estate is advantageous because of its potential for financial leverage. Financial leverage allows you to invest money that isn’t yours. In this case, you’ll be using a loan to purchase new properties. You’ll still need to provide a down payment and cover various expenses, but securing these loans and investing with borrowed money can allow you to quickly snowball your wealth.
Diverse Options
In the real estate world, you have a wide variety of options. You can balance your portfolio according to your personal risk tolerance and strategic aims, and you can find investment opportunities practically anywhere.
Potentially High Long-Term Growth
There’s considerable opportunities for long-term growth. Buying a cheap house in a growing neighborhood could allow you to multiply your asset value many times over in the span of a decade. Flipping a house could entitle you to a massive, almost immediate profit.
Consistent Income
Many retirees and future retirees appreciate that real estate is capable of generating consistent income. If your monthly expenses for a given property total $1200, and the property is generating $1800 of monthly income when occupied, that’s a fairly reliable $600 a month you’ll be getting. In a portfolio with many rental properties, you can conceivably meet or exceed all your necessary expenses and then some. You’ll also be insulated from the effects of vacancies as well.
REIT Options
If you don’t like the idea of hunting down individual houses or properties to add to your portfolio, you can always invest in a real estate investment trust (REIT). You can buy, hold, and sell shares of this type of asset, just as you would with shares of stock. It’s a way of indirectly investing in real estate, so you can benefit from the market dynamics without needing to expend as much effort for due diligence or ongoing management.
Cons of Real Estate Investing
Now let’s turn our attention to some of the downsides of real estate for retirement investing:
Minimal Liquidity
Real estate is generally known as an illiquid investment. Your funds are going to be tied up in the equity of your real estate holdings. If you need to make an emergency purchase, this money may not be immediately available to you. A home equity line of credit may be able to give you the capital you need, but this is still a time-consuming process.
Upkeep/Management
Managing a property is often called a passive income source, but this sometimes leads people to underestimate just how much upkeep and management is required. As a landlord, you’ll be on call for emergencies and you may have to coordinate repairs and maintenance efforts regularly. If you’re hoping to enjoy your retirement without work or interruptions, this can be a major buzzkill.
Tenant Issues
Screening tenants and aiming for quality tenants instead of fast vacancy closures can help you minimize the potential for tenant issues. However, it’s still possible to have a tenant who doesn’t pay rent, damages your property, or causes strife in the neighborhood. These can all reduce the value of your property, compromise your income, and create other headaches.
Pros and Cons of Cryptocurrency for Retirement Investing
There are some significant pros and cons of cryptocurrency to consider.
Pros of Cryptocurrency Investing
A Novel Hedge
Investing in cryptocurrency isn’t like investing in stocks, bonds, real estate, or other conventional assets. It’s an entirely novel area of investment and can serve as a good hedge against more mainstream options. If the entire economy or some stocks tank, crypto might start performing exceptionally well. Just keep in mind this isn’t a guarantee.
Explosive Growth Potential
We’ve all heard of Bitcoin millionaires, who started with a modest stake in the cryptocurrency and ended up becoming wealthy. This is not a typical story, nor is it something you can count on. But we do need to acknowledge that there is explosive growth potential here.
Several Options
Many people treat Bitcoin and cryptocurrency as synonymous terms, but the reality is that Bitcoin is only one of dozens of mainstream cryptocurrencies. There are likely hundreds of new cryptocurrencies to arrive in the future. With so many options, it’s not exceptionally difficult to find a good fit for your portfolio.
Insulation From Inflation
Many cryptocurrencies, including Bitcoin, are designed to be insulated from the effects of inflation. Inflation is largely a byproduct of money supply issues, but because the supply of crypto is fixed, it’s a non-issue. If you’re concerned about inflation, this makes crypto a respectable holding.
Decentralization and Anonymity
Some investors appreciate that Bitcoin is both decentralized and anonymous. It’s not affected by the actions of central banks, and it can keep your transaction information more private.
Liquidity
Though newer and less frequently traded coins sometimes have liquidity issues, more prominent, mainstream coins offer significant liquidity, especially when compared to real estate.
Cons of Cryptocurrency Investing
And of course, there are also some disadvantages:
Steep Learning Curve
Crypto is associated with a steep learning curve, which may feel even steeper to an older adult unfamiliar with blockchain technology. If you have issues learning the difference between hot wallets and cold wallets, or if you already have trouble with simple online banking, this may not be an investment option for you.
Potential Scams
Cryptocurrency scams are common. They’re easy to spot if you know what to look for and if you generally stick to mainstream coins and trading platforms. However, it’s still important to be wary of the financial dangers here.
Untested, Unpredictable Performance
Cryptocurrency is still a relatively new investment asset, so there isn’t much historical precedent for performance under various conditions. The information we do have is skewed in various ways. For example, Bitcoin’s explosive and incredible growth at the end of 2017 is a unique phenomenon we probably will never see again. It’s prudent to view crypto as untested and unpredictable as an investment asset.
No Direct Income
Remember, crypto is designed as a currency, not as an investment. Accordingly, it doesn’t produce any consistent income by itself.
Legal Risks
If the government bans crypto or produces a digital currency of its own, the value of your crypto investments could crash overnight.
The Bottom Line
On the face of it, real estate is a superior investment for retirees and future retirees. It tends to be more stable, it’s easier to understand, it generates more consistent income, and it can even help you accumulate wealth faster in many cases. That’s not to say that cryptocurrency shouldn’t be a part of your portfolio, or that it’s not worth considering. Many proponents of investment diversification now recommend keeping at least a portion of your portfolio in cryptocurrency.
But right now, cryptocurrency is too volatile, too untested, and too impractical to dethrone real estate as an ideal retirement investment.
[Related: Why Owning Real Estate Will Help You Retire Faster, Healthier, and Wealthier]
Featured Image Credit: Photo by Tima Miroshnichenko; Pexels; Thank you.
