Real Estate Stable Coin

Some time ago, a friend of mine, Sudato M O'Benshee, invited me to consult on a new project he is doing. He created a new, virtual currency he calls CuBit. The actual name is the Universal Real Estate Stable Coin™ (URESCu™), but the basic denomination is called a CuBit™, so most folks just call it that.

It is unlike any cryptocurrency you have ever heard of. I will have lots to say about this in the future. Based on what I saw, I wrote the following article. Things may have changed slightly since then, but not a lot. I can publish this now because yesterday he made the first public announcement about CuBit™.

A Comparison of Direct Real Estate Investing Versus CuBit™

(c) Copyright 2024 The Savvy RE Investor and A Plus Results, LLC

CuBit™ is a registered trademark of Universal Real Estate Wealth Protection Solutions, LLC

Among the secrets of the rich (and famous) the role of real estate in building and maintaining long-term wealth is well known. Regardless of how wealth was earned, the wealthy consistently funnel large amounts of their wealth into real estate to preserve it against the ravages of inflation and volatility, and to grow it through appreciation and income.

Secrets of the Rich

When considering whether to include real estate in your wealth building efforts, a couple of simple internet searches can be both informative in their contents and educational in the high-level results. The figure beside (Figure 1 - Benefits of Real Estate Search Results) reveals that in less than 1 second you can find nearly 900 million reasons (multiplied by the number of reasons in each search result) why you should invest in real estate.

Dangers

A similar search, looking for the downsides of real estate (see Figure 2 Dangers of Real Estate Investing) gives you nearly 18 million reasons (multiplied by the number of reasons in each article) why investing in real estate may not be such a good idea.

800 Million Reasons

It is worth noting that the reasons for investing in real estate appear to be 50 times greater than the reasons to avoid real estate (900 million results compared to 18 million results). While that number isn’t scientifically or mathematically sound for calculating your odds, it does reveal that the benefits of investing in real estate appear to significantly outweigh the problems, by a pretty substantial margin.

Without reading all 893 million search results, which notably include many advertisements for companies and individuals who will be happy to take your money and invest it in real estate for you, the Savvy Real Estate Investor has summarized the benefits of direct investment in real estate to the following 7 points.

7 Benefits of directly investing in real estate

1.     Real estate returns consistently outperform investments in stocks and bonds

2.     Diversifying your portfolio into different classes of assets reduces your risk of losses due to volatility

3.     Income

4.     Tax breaks

5.     Appreciation – hedge against inflation

6.     Equity

7.     Leverage

1) Performance - Real estate returns consistently outperform investments in stocks and bonds

Private Investing is the Bomb

The graph (beside) shows how private real estate investing has performed over the past 20 years compared to real estate investment trusts (REITs), bonds, and stocks during the same period. As you can see real estate is the big winner across all these categories.

Source: Fundrise (Fundrise.com, 2022)

Even when risks are factored in, this performance compares favorably.

2) Diversification

Diversifying your portfolio into different classes of assets reduces your risk of losses due to volatility

“By spreading your funds across a number of different vehicles, you can more effectively offset losses, should they occur.”

Aly J. Yale, Millionacres.com[1]

[1] https://www.millionacres.com/real-estate-basics/investing-basics/benefits-of-investing-in-real-estate/

Investing is never an unbroken stream of wins, with no losses. A key practice taught by Investools’[1] investor education is to let your winners run and cut your losers short. The principle behind this is to minimize the damage done when an investment position goes against you. Diversification of your portfolio is less about minimizing the damage and more about hedging your bets that your wins will more than offset your losses. That won’t be possible if all your money is invested in one asset.

[1] Investools is a registered trademark of ThinkOrSwim Group and TD Ameritrade Holdings, Inc.

3) Income

Income can be a significant benefit from real estate investing. To be totally clear, this doesn’t usually come from buying your own home. The trend to take advantage of AirBnB notwithstanding, most people pay more into their homes each year than any income it gives back to them.

Income generating real estate is almost exclusively about rental property. This is true regardless of the type of property. If you invest in storage facilities, you are renting out each unit. If you invest in single family homes, you are renting out each house. If you invest in strip malls, you are renting out each storefront. And the list goes on, and on.

When directly investing in real estate the income generated is a key consideration. That income will help offset costs of ownership and, if it exceeds the costs of ownership, may be available to grow your wealth.

4) Tax Breaks

Direct investing in real estate is, de facto, owning a business. Each property you own is a separate business and all-together, they are a business conglomerate.

Businesses get treated differently

Robert Kiyosaki, in his landmark book Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not! (Kiyosaki, 2017) makes the point that businesses get very different tax treatment than do individuals.

Businesses deduct their expenses from their income and only pay taxes on the profit. Individuals pay taxes on their gross income (“adjusted gross income”) with a general disregard for how much they have had in expenses.

Individual Tax Breaks Are Disappearing

For many years individuals could reduce their taxes by showing how much they paid in interest on their mortgage. With the recent increase in the standard deduction that specific benefit has essentially disappeared for most individuals. There is no standard deduction for businesses, so every dollar of expenses decreases their tax liability. That mortgage interest may be one factor reducing your taxes on your real estate investment.

Real Estate Gets Special Treatment

Real estate, at least the buildings on top of the dirt, according to the tax man are usually considered depreciating assets – they get less valuable over time. This means you may get to take a tax loss because of the assumed decrease in the value of your real estate. Sometimes the tax loss more than offsets your positive cash flow from the same property.

However, this is not all sunshine and rainbows. When you sell the real estate the tax man realizes that you made money and the real estate may have increased in value. So, they recover the depreciation (meaning you must give it back) when you sell.

Depending on where your real estate is located, there may be other tax breaks as well. Designated economic recovery zones, disaster zones, and others may qualify for additional tax incentives.

5) Appreciation - hedge against inflation

Notwithstanding the tax man’s view of the depreciating value of your real estate, most real estate increases in value over time. The underlying reason for this is that population growth creates an increasing demand for real estate while the core supply of available real estate isn’t growing. In fact, although real estate development continues, God isn’t making more real estate on this planet, so the supply is limited. In other words, “they aren’t making any more of it.”

This fundamental example of the effects of supply and demand is why real estate is almost unparalleled in its value as a hedge against inflation.

While currencies are subjected to devaluation through inflation, real estate keeps increasing in value. Historically the increase in the value of real estate has outpaced inflation. This means you can usually realize a gain when you decide it is time to sell your real estate investment. The chart below (Figure 8 Average US Home Prices Since 1963) shows the behavior of home prices. The gray vertical bands are when the US economy was in recession.

Rents too tend to increase over time. Your role of a landlord requires you to pay more for goods and services as inflation lifts prices. You need to ensure your income stream from your real estate keeps pace with inflation so your cash flow from real estate remains positive.

6) Equity

Equity is your net ownership of real estate. Estimate the market value of your real estate and subtract what loans you have against that real estate, what remains is your equity.

During the financial crisis of 2008-2012 the downturn in property values created situations where many real estate owners had negative equity. The amount of their loans exceeded the value of the real estate. 

In general, real estate investors enjoy increasing equity from three factors:

3 Factors Increasing Equity

7) Leverage

Leverage means borrowing money. Real estate is one of the few investments where banks will happily lend you money to make an investment. They are willing to do that because they recognize the inherent value of real estate and know that if you fail to repay your loan, they can take the property away from you and sell it to regain the money they loaned you. They call that a collateralized loan because you promise they can take the real estate if you fail to pay as agreed.

From your standpoint as a direct investor in real estate, leverage means that you can invest a fraction of the value of a real estate asset (usually not less than 20%) and get the other 80% of the cost of the investment as a loan. 

Eight Dangers of Directly Investing in Real Estate 

1.     High cost of entry

2.     Locality specific

3.     Negative cash flow (expenses)

4.     Deal problems

5.     Building problems

6.     Illiquid

7.     Debt service

8.     Complicated taxes

As pointed out at the start of this article, investing in real estate also has many risks or downsides. Sparing you the tedium of looking up the 17.6 million dangers showing up in Google, the Savvy RE Investor will summarize for you the 8 major problems with owning real estate.

1) High Cost of Entry

In case you didn’t realize it, buying real estate takes a lot of money. That chart shows the rise in home prices over time (Figure 8 Average US Home Prices Since 1963) is great news if you own real estate. It is not as much fun if you are trying to buy real estate. Across the USA, on nearly every weekend, there is some self-proclaimed real estate expert offering a seminar to teach you how to invest in real estate in your spare time with none of your own money. Experience shows that these claims range from being incomplete to downright misleading.

For instance, take the claim that you can do this “in your spare time.” Recall that directly investing in real estate is a business. Every entrepreneur will tell you plainly that setting up and properly running a business takes time. A lot of time. In this case, your spare time had better be no less what you would expect to devote to a part-time job, about 20 hours per week, or more. (Sheppard, Millionaire Liar, 2013)

You will invest time first in learning the business. That will take both time and money.

Does 20 hours (or more) per week sound like your "spare" time?

Finding Money to do Real Estate is another job.

Next, you will search for deals. When you find a prospective deal, you will invest hours crafting offers, presenting offers, and researching the property. If your deal is accepted you will invest more time finding someone to fund your deal (a lender, partner, or buyer).

If you are partially or fully funding your own deals (skipping the “none of your own money” part of the pitch), you will need access to thousands, or hundreds of thousands of dollars to be able to buy, fix up, and sell, or rent your property.

Some experts teach techniques to buy properties with “no money down.” While these deals can be made, the result is usually a real estate investment where your equity is near zero (or negative) and one wrong move will cause you to lose the investment to the lenders who are carrying the debts on the property.

2) Location Specific

Real estate sales agents will consistently tell you that the three most important factors affecting the value of real estate are 1) Location, 2) Location, and 3) Location.


“When buying any investment property, the location should always be your primary consideration.”

Ruth Lyons, InvestorJunkie.com[1]

[1] https://investorjunkie.com/real-estate/risks-of-real-estate-1/

Immobile: With few exceptions, you cannot move a real estate investment to a more desirable location. Property values depend heavily on the immediate, geographic market conditions around them. These local conditions are far more volatile than the same considerations for a larger area.

Volatile: If crime goes up in the neighborhood of your property, values go down. Values in other neighborhoods of the same town may stay high or go up. That doesn’t help you.

Zoning changes are very location specific. If the town council changes the zoning, your quiet residential street might become a busy commercial center or your busy commercial center might become a wasteland of derelict store fronts.

Concentration Risk: The high cost of investing in real estate often means that, until you get successful, your investments are all geographically close together. This is called concentration risk. It means that the value of your entire real estate investment portfolio can be devastated by one, location-specific, event. Tornados, hurricanes, earthquakes, zoning changes, factory closures are all events where the worst impacts tend to be focused on small areas. Any of these, and more, can abruptly remove all the benefits of your real estate investment while leaving you with significant debts and other costs which you pay, unless you walk away and lose it all.

3) Negative Cash Flow

Assuming when you made your investment in direct real estate you ran the numbers and didn’t over-leverage yourself into a negative cash flow, then are two other primary causes why you might have to dig into your savings account to keep your real estate investments alive.

Vacancies: When no one is renting your property you still have to pay the taxes, insurance, maintenance, and any debt service on the property. (Sheppard, The Tired Landlord Program (2nd Edition) (The Savvy RE Investor Book 1), 2022) The Savvy RE Investor builds an estimated vacancy rate into the numbers when considering the deal. That rate is based on historical information and experience. However, as noted above with concentration risk, sometimes even The Savvy RE Investor can get caught off-guard and experience higher than anticipated vacancies.

When this happens, financial reserves are used. For most people, that means their savings and checking accounts. It may even mean taking money out of a 401k or IRA to ensure you can carry the property until you can fix the vacancy problems. Otherwise, you may have to give the property to your lenders.

Problem tenants: Every landlord, without fail, can tell you stories about the “tenants from Hell.” Typical problems are: 1) failing to pay rent on time, 2) failing to pay rent at all, 3) making the place look trashy, 4) damaging the property, 5) running drugs out of the property, 6) unending complaints, 7) calls at all hours, 8) bringing in other people you didn’t approve, and the list goes on, and on.

While you have a problem tenant in place, often the cash flow from your property slows or stops. In addition to this decrease in revenue you must spend money on legal fees to get them evicted. Then, when they are gone, you will have to invest time and money to get the property move-in ready before you can begin showing it to prospective tenants. Sometimes this means tens of thousands of dollars in repairs.

You can pursue legal action against the problem tenants to get them to pay. After you pay your attorney to get a judgement against them, you get to pay a collection agent to try to get them to pay. Even if your collection agent finds them, chances are good they don’t have any resources to pay what they owe you.

And, while all these legal actions and repairs are going on you still must keep paying the taxes, insurance, maintenance, and debt service.

4) Deal Problems

When you directly invest in real estate there is always a “deal” involved. This is true regardless of whether you are the only investor, or if you are one of many investors (this is known as fractionalized ownership).

The Savvy RE Investor carefully considers all aspects of the deal and looks at what can go wrong. Understanding what will happen when things go wrong is the essence of risk identification. Building controls, warning mechanisms, and countermeasures into the deal is risk management. All this needs to be done whether you are buying into someone else’s deal or crafting it all for yourself. Failure to do this is failure.

Regardless of your risk management, lenders and property expenses have the first claims on revenues from real estate deals. Investors and deal managers are the last people to get paid in almost all deals. If the deal, or the property, have problems the risks of you losing all or a portion of your investment go up.

If the lender forecloses on your real estate, they get back all their money before you get any of yours.

5) Building Problems

When you make a direct real estate investment it usually involves a building. For the untrained eye, just looking at a building rarely reveals if there are problems (large or small) which could adversely affect your investment, either requiring you to invest much more than you planned or destroying the value of your investment.

Can you tell, just by looking, if that is lead-based paint on the walls or asbestos in the ceiling tiles? Professional building inspectors get dirty crawling under buildings, through attics, peering behind walls, and generally poking and prodding all over buildings, as well as researching some history on the building to help them identify apparent and unseen problems.

If your real estate investment wasn’t properly inspected, the costs of remediation can be very high. Typically, while you remediate them you won’t have any income off the property, and you will still have to pay those pesky carrying costs of insurance, maintenance, taxes, and debt service.

6) Illiquid

“Liquidity is the ability to access the money you have within an investment. One risk of real estate investing is that investment properties are illiquid, meaning you can’t easily convert them into cash. Selling a property is neither a quick nor a simple process and selling quickly or under pressure will most likely result in taking a loss on your investment.

 

“This lack of liquidity forces real estate investors to hold their investments for longer than other types of investments, which is risky for those who might need access to cash quickly if necessary.”

Mashvisor.com[1]

[1] https://www.mashvisor.com/blog/major-risks-real-estate-investing/

7) Debt Service

The Savvy RE Investor has been both borrower and lender. The first lesson learned from this experience is that leverage is both the boon and bane of the real estate investor. While it allows you to build a much larger real estate portfolio than would otherwise be the case, it seriously escalates the risk that you will lose all that portfolio, and your equity with it, if sufficient problems occur.

When you lend money, the interest on the loan is wonderful to receive. It is your money making more money for you. When you borrow money, the interest you pay is relentless. You must pay it every hour of every day for as long as the loan is in force. This is true regardless of whether the property has a positive or negative cash flow.

“Interest is a faithful servant and a relentless master.”

Unknown

When you borrow money to buy real estate, the sums are large, and the interest paid is often far larger than the principal borrowed.

The best way to buy real estate is without using debt service. This allows you to keep more of the profits and gives you a better cushion against problems with the property. Unfortunately for most people, paying all cash for real estate is a very expensive proposition. Few have the financial resources to buy real estate without resorting to using loans and servicing that debt.

8) Complicated Taxes

Those tax benefits mentioned earlier, depreciation, cash flow, etc., all add complications to your tax situation. As a business, you have already complicated your taxes with your expense tracking, revenues, cost of goods, etc. With real estate investing you multiply all of that for each property and add depreciation schedules and other complications as well.

Chances are good that when you invest directly in real estate your taxes will quickly become far too complicated for you to do them yourself. You may need both an accountant and a paid tax preparer to make sure you don’t get on the wrong side of the tax man.

How CuBit™ Manages All This

1) Low Cost of Entry

A single CuBit™ can be acquired from Universal Real Estate Wealth Protection Solutions, LLC (the Company) for about $120. As investments go, that is about as low a cost of entry as you will find. You can purchase CuBit™ in smaller increments as well, all the way down to a Mote, which is that thing “in your brother’s eye” and is a tiny, tiny fraction of a penny in USD ($ 0.00000009.)

2) Diverse localities & properties

The Company is establishing affiliates to purchase income properties in major real estate markets all over the USA, with plans for international expansion and can handle a wide variety of types of real estate investments.

3) No Cash Flow (+ or -)

If there is a downside to CuBit™ it is this. CuBit™ is a currency, not a security. When you buy a Euro with USD, it doesn’t come with dividends or cash flow. That is true also when you buy CuBit™ .

The cashflow from the income properties the Company purchases is used first to pay the expenses of the company and can be used for reinvestment in additional real estate. Some is also kept in the treasury of the Company as a liquid reserve to handle situations where a property might produce negative cash flows.

While some might complain that this insulation of CuBit™ holders from real estate deprives them of the cash flow, you could also argue that it also insulates them against negative cash flows.

4) Simple Tax Situation

Acquiring CuBit™ is not a direct investment in real estate. Not even a fractional investment in real estate. Because of that, CuBit™ holders have none of the tax complications associated with real estate investing. All of that is handled by the Company. All you need to do is keep track of how much you exchanged for your CuBit™ when you acquired it, and how much you got for it when you redeemed it. The Internal Revenues Service will want to take their bite out of your gains.

5) Standardized Deal Structures

The Company employs a small army (would you believe a platoon, or just a squad?) of real estate experts and attorneys. They standardize their deal structures based on the type of real estate and the type of deal (fix-and-flip, buy-and-hold, etc.). Then, they use smart contracts to turn every deal into the equivalent of a computer program. Payments go in, expenses come out, and paper-shuffling is kept to a minimum.

6) Rigorous Due Diligence

Through its innovative use of affiliates, the Company employs the services of local real estate experts to evaluate every aspect of every deal while considering the nuances of specific location. The experts follow standardized and rigorous processes to ensure that risks and all other aspects of the property, the deal, and the partners involved are properly managed.

7) Highly Liquid

CuBit™  is a currency. It is as fungible as the US Dollar. This means that, just as you can trade someone a $20 bill for two $10 bills, you can trade 100 CuBit™ for one CAc (a CAc, or CuBitAcre is ten times the value of a CuBit™).

As mentioned, CuBit™ is not a direct investment in real estate. This means you don’t have to sell real estate to get your value back out of CuBit™. At any time, you can take your CuBit™ to the Company website and cash it in for its equivalent value in ETH, BTC, or USD[1]. Soon, CuBit™ may be available on other digital exchanges, and you won’t have to rely on the Company to exchange your CuBit™ .

[1] BTC (BitCoin), ETH (Ether), and USD (US Dollars) are the native exchange pairings used by the Company. Exchanges into any other currencies would need to be done by a third party and would not involve the Company in any way.

8) No Debt Service

There are many risks involved with directly investing in real estate. The Company understands those risks and takes many actions to dramatically reduce them. If the Company were to leverage CuBit™ they could buy much more real estate. However, they would also dramatically increase the risk of losing it all and destroying the basic value proposition of CuBit™. The Company has chosen to avoid leverage risks entirely.

This means that if an investment goes bad, the costs will not be driven higher by the need to service the debt. Instead, the problem can be remedied, or the property liquidated, without the interference or considerations due to a lender. This approach is much more likely to protect the value of CuBit™ than would be the case if leverage were used.

Conclusions

Directly investing in real estate, either on your own or through fractionalized investments like REITs, loan syndications, and private investment groups is not for the faint of heart, nor for anyone ignorant of the risks.

Carlton Sheets, the master of “Buying Real Estate With No Money Down,” (Sheets, How to Buy Your First Home or Investment Property with No Down Payment, 1985-1999) has opined that if you have little knowledge or experience in real estate investing, but you have lots of money to invest, and you partner with someone who has lots of knowledge and experience, but no money, when the deal is done, you will have the experience and the partner will have your money. (Sheets, Creating Quick Wealth With Partners, 1999) He based that opinion on both his own experience and that of others. Unfortunately, he was not wrong. Successfully investing directly in real estate requires knowledge, experience, and money.

CuBit™ represents a unique opportunity for ordinary folks to gain some of the most important benefits of reduced volatility and hedging against inflation which come from real estate investing without exposing yourself to all the dangers that come with those benefits. It makes these benefits available to you even if you don’t have hundreds of thousands of dollars to invest.

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