POSIWID: Real Estate
POSIWID: The purpose of the system is what it does.
Assume G7 central bank money supply inflation is 10% per year.
If you're already wealthy, you can just buy stocks/art/gold/land/collectibles outright and stay rich.
You match or beat inflation.
If you're not wealthy, you can borrow and lever up at 7-10%, buy rental properties for 25% down that are massively tax advantaged, and return 10-20% on your cash invested each year.
You match or beat inflation after a few years. (Your properties must stabilize and cash flow first.)
The system is so arranged that anyone that does one of the two options above is at an advantage. And anyone that doesn't is at a huge disadvantage.
Are there any alternatives?
Yes, perhaps. This is a big part of the promise of bitcoin. The idea that you don't need to learn how to invest in stocks or rental properties in order to make real decent inflation-adjusted returns (e.g. perhaps 5-10% a year on average).
The problem is it's just so volatile. It's really difficult to go all-in, unless you've sufficiently orange-pilled your spouse and have plentiful reserves already.
The idea of an 80% drawdown, extended bear market, lasting 3-5 years, is intolerable for 99% of people.
Plus the tax treatment of bitcoin is terrible. You may owe upwards of one-third of your nominal fiat gains on bitcoin to the authorities if you live in a state like California.
Over a 5-year time frame, with inflation as high as it is, I would give a 50/50 chance of matching or beating inflation in real terms.
Just consider: with bitcoin at 100,000. If the money supply and prices go up 10% per year... 110,000 -> 121,000 -> 133,100 -> 146,410 -> 161,051 is the required bitcoin target to break even BEFORE taxes after 5 years.
Assume you pay 15% on your long-term gains on bitcoin. If bitcoin goes up 20% per year... 120,000 -> 144,000 -> 172,800 -> 207,360 -> 248,832 (22,325 tax owed) ... after-tax you have 226,507, and the inflation-adjusted cost of your bitcoin is 161,051. So your real gain over 5 years is 65,456. Plugging this into a CAGR calculator, you'll see that in an income-tax free state, your total real, after-tax return is more like 7% per year.
Sadly this is but a hypothetical example. You aren't actually likely to realize these exact returns. Bitcoin is volatile. And in every 5 year period so far we've experienced at least 1 bear market. So there is no guarantee that you'll reap 7% real annual returns. In fact it's very unlikely.
To be fair, you might do well if you buy and hold over such a time frame. But no one can tell you what you should expect to earn in the end...
This is why I'd give it a 50/50 chance for you to break even after taxes and inflation over any given five year period going forward.
And so, I believe, rental property investing will continue to be an attractive option for some time. (Did I mention you can recycle your gains tax-free into more and better properties using like-kind exchange?)
Rental property investing is granted greater legal protection and tax advantages than any other kind of custodial investment or account (such as bitcoin on coinbase, in an ETF, or stocks/bonds in a brokerage account).
Each property can be wrapped in an LLC, and there must be due cause for it to be sued or seized.
Even if you are sued and lose on one property, the blast radius is limited to said property. The damage is contained.
Of course, hiring a registered agent, creating LLCs, setting up a PO Box, hiring a CPA and property managers are all a must for the prudent investor.
These hoops are somewhat annoying to hop through, but not really that complicated. And once they are set up, it all becomes much more passive. Not to mention protected.
Following this formula, as many investors do... Buying in linear (stable) markets; Buying turnkey properties with positive cashflow; Maximizing leverage... This is what turns ordinary salaried employees into superpowered investors.
The trajectory is not glamorous or fast, but it is a proven path to wealth.
Leaving aside for a second the morality of the system... (Should it even be allowed to exist?) The fact is that the current system actively rewards certain behaviors (investing in rental properties), and penalizes others (tax-inflate-regulate bitcoin).
The barriers to entry into the capital and wealth hierarchy are mainly about education. You as a W2 employee see the city from one side, with a great, impenetrable wall wrapped around it. But if you walk a quarter of the way around the outside of the city wall, you'll see a large, glimmering gate, wide open. There is a trickle of people, new investors, walking through. Do you enter the city through this gate? Or do you choose to try to scramble over the wall, building a ramp of your own design made up of wads of cash from the realized profits on your now-spent transaction outputs?