Why There Won’t Be A Real Estate Crash In 2020?

in LeoFinance7 months ago (edited)

If you’re like me you’ve been looking forward to a crash for the last 12 years! Ever since the collapse of 2008 real estate investors all across the country have been dying for the opportunity to buy houses at a discount of 20%-70% off in places like we saw in Las Vegas, parts of Texas and Phoenix, AZ.
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Why haven’t we seen those prices? When will there be a crash? We know there’s a crash every 7-14 years and yet here we are 12 years into a booming real estate market with a global pandemic, Covid recession in the stock market, increased unemployment and still no sign of a crash insight.

In This Article I Want To Discuss The Five Reasons I Don’t See A Crash In 2020 Or 2021.

I teach a free online training for real estate investors and real estate agents who are looking to be investors or want to learn how to work with investors. I always get the best questions and they often are the inspiration for this blog. I was asked by one of my extremely success students who has grown to become a friend as well, “what do I do if I have a client who wants to wait until the spring to buy their investment property”?

This question came after I made the statement that as a real estate agent your job is to help an investor put in offers within 2 weeks of first contact. I have found that if they aren’t putting in offers in this 2-3 week range they will likely not buy a house. The reasons are for a whole other article, but for now, let’s stick to why there won’t be a real estate crash.

Reason #1 This Is The “Coronavirus Housing Boom!”

For calling the coronavirus housing boom is a time where people realize that they actually need their house. They are getting away from the cities, they are moving towards the suburbs, they are willing to pay more for housing just to get away from people. It’s a time where people are starting to realize the value of their property and their freedom more than just as a place to live somewhere.

Another reason that people are moving to the suburbs is they realize they don’t need their jobs anymore, their jobs no longer holding them in physical place and so they can avoid their commutes. Many people have discovered that the suburbs an outside of cities can be far more affordable and have better school systems. This is a major driver for people with young families and people with higher end jobs or office work that doesn’t require them to be in place

Reason #2 Is Supply And Demand

This is a simple function of economics that means the more supply or available housing in this case, the lower prices would be and on the other side. The less there is of something, the more expensive it is. We’re currently in a state of the real estate market where we don’t have enough housing for the amount of people out of there who are looking for a place to live. This is why we see rents and home prices on the rise. We call this a “Sellers” market, because seller’s are the people who have the advantage.

In to give you an idea of just HOW LOW inventory is we can look at the fact that builders typically in the past would build about 1.5 million houses a year. Now in the last 10 years, however since the recession we’ve only been building 900,000 a year which is a 600,000 house per year decrease! That’s over 6 million houses that are “missing inventory” in the market that should have been in existence!

The reason builders are not building the way they used to is because they got burned so bad in the Great Recession that they decided let’s just do different things, let’s build less let’s be more cautious. Now we’re paying for their cautiousness in home prices .

Reason #3 Housing Prices Are Not Inflated

The cost of building homes is more expensive, the codes are higher, it is costing more to build those properties, the lumber is more expensive, the materials are more expensive, the requirements to build A home now costs more than it did 20 years ago; and so we’re seeing that take effect in how much time is spent in building the property, how much the new materials are costing and, of course, the price of land is going up because they’re not making any more of it, and so we’re seeing all of these price reasons drive the real estate market up.

Reason #4 Interest Rates Are At An All Time Low And They Have Been For Over A Decade Interest.

Everybody in real estate knows that interest rates control the price of real estate. As interest rates go lower, prices go up because you can afford more house per month, and as interest rates go up, home prices go down because the home becomes less and less affordable as payments increase.

We’ve been in a long run of low interest rates that I’ve just continuously driven real estate prices higher. Coupled with COVID-19 now interest rates are even lower despite that the FED was attempting to increase earlier in the year.

Reason #5 There Is A Large Pool Of Real Estate Investors And Buyers In The Market Now

Even though we’re at an all-time high for unemployment there are still many stable home buyers who are looking to increase and expand.

In-fact millennials make up the largest demographic of first-time homebuyers. The average millennial is becoming 32 years old and they are the largest generation since the baby boom generation. In fact, they are larger than the baby boom generation.

And if you’ve been in real estate, you know the demographics are 31 years old is the average homebuyer. Millennials will now turning 32 and so they are for the next 5 to 10 years going to be the largest group of home buyers that we have ever seen hit the market and they’re hitting at a time with low interest rates with high demand and low supply .

Bonus Reason #6 Lenders Aren’t Approving Subprime Loans Anymore

The changes due to the Dodd Frank act made everything safer for homebuyers, so the mortgages that are being taken out are real honest payable mortgages. Any person who’s able to approve for them can actually afford an handle unlike the subprime mortgages are being handed out in 2005 and six and seven the mortgage is being handed out now, and for the last decade have been stable steady consistent well documented financially strong people .

What is this all mean for real estate investors who are looking to buy their first investments?!

#1 Don’t wait to buy real estate, by real estate and wait.

#2 Save to invest, don’t save for a rainy day.

#3 Buy an owner occupied multifamily between two and four units.

#4 Start building your cash position, hunt for real estate with a real estate agent, get pre-approved and close the deal.

Don’t wait for this market to drop because I don’t see it happening anytime in the near future but also don’t buy garbage. Evaluate your deals, make sure they cash flow, buy steady and slow and do not, do not over leverage in this market.

The only way you can lose in real estate is to be over leveraged and be forced to sell in a down market.

It can be very tempting to believe that there is a crash around the corner if you are only looking at the media and listening to people who still have fears from the last market correction, but it is important to realize that we are in a very new real estate market. The steps the government has taken after the last crash and even more so during the pandemic have “pushed” our nearly guaranteed crash farther out into the future.

Don’t get me wrong. There will be a series of corrections over the next few decades. Some will be worse than others and certainly right now we do see some real estate sectors like retail, office space and other forms of commercial real estate taking a hit. Which could lead to some lower prices in those sectors, but for the time being, I would venture to say that Residential real estate is still in the middle of the largest real estate bubble the world has ever seen.

Like the childhood game of musical chairs, we are all listening to the music and looking for the right chair or in this analogy, the right rental property. In the words of one of my mentors, “Make sure you have a chair when the music stops”. Buy real estate, but make sure you can afford it for the long run. Make sure there is cashflow and when you have a choice, Always work with the best!

Learn more about my 52 Principles to Wealth and Riches this Saturday at 10am EST: HTTP://www.GualterAmarelo.com/live

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Welcome to LEO my friend! Great to have another awesome content creator join us. #alchemistnation!

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@scaredycatguide You are the man! Let's keep building this community!

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@leoschein we have friends on here!

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@scaredycatguide-Thanks! and look forward to both of your posts!

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Look at Cat Man go. Happy to have all of you here on LeoFinance :)

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Yea I agree, especially in large metropolitan areas. I'm in Atlanta and the market has actually picked up because of the low interest rates. Still a seller's market indeed. Commercial has already started taking a hit though, and I expect a big correction in the luxury residential market. But yea, no crash...we'll see what happens when all the eviction/foreclosure protections run dry...

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@opinizeunltd You've got the right idea man! I got to drive through Atlanta on my way down to Tampa and the real estate market there looks pretty hot! We've been seeing a similar hit with the commercial market in Massachusetts and like you mentioned, "evictions/foreclosures protections" are running dry soon.

What has your exposure been to real estate in this recent boom and what are you looking to do next?

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My big concern with real estate is when the mortgage and rent moratoriums expire and there are still 20-30 million people unemployed. They're going to have to move and that supply will depress prices.

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Looking forward to all the single family REOs we can scoop up for Real Blocks!

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@scaredycatguide Let's do it brother! There is going to be an abundance of opportunities all across the country for everyone who is ready to jump in!

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@nealmcsadden I agree with you 100%. Anyone who has exposure to the single family, condo and luxury markets are going to be hit the hardest. During times of inflation like we are seeing the biggest consistency is that people shift into renting apartments and so I see rents rising and multifamily prices declining less than the other Real Estate Assets.

Selling some single families and condos right now, might be a good play and stacking up some assets in the crypto and precious metals class might be a good hedge.

@scaredycatguide has the right idea! Let's buy the bottom!

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Nice one!
One of the point I have overlooked are the low interest rates.
Housing is basically one of the best investment vehicles. Apart from crypto :)

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@dalz you have that right! It's the leverage on low interest rates that makes having some real estate in your portfolio a great hedge against inflation. Especially if it is cash-flowing real estate that also has the opportunity to appreciate.

Real Estate, Crypto, Precious Metals, Equities, Debt and Fiat "dollars" all have a place in a well balanced portfolio, but like Warren Buffett is always saying, "stick to what you know". We specialize to create massive wealth and we diversify to protect it!

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We specialize to create massive wealth and we diversify to protect it!

Yep :)

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Great content, my goodness! I don't know much about real estate but I've been reading @scaredycatguide's Real estate posts and it's really eye opening. Welcome to Leo

@josediccus yeah man, he is one of my real estate buddies and an awesome investor!

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I'll be checking out for more of his contents to eventually learn from them.

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@josediccus you are learning from the best! @scaredycatguide is the authority when it comes to how to evaluate a deal and making sure the numbers work!

I appreciate your feedback my friend. If you had to decide on 1 thing, what would you say is the biggest difference between and Crpyto and Real Estate from what you have learned so far?

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I'll say real estate is real time and crypto of course isn't. Although I believe the both are ventures that are creating wealth and value tremendously and of course very futuristic too.
I'll be looking out for more of your contents, cheers!

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@josediccus I love that response! I am looking forward to more of your feedback! Cheers to our success!

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@trumpman2 thanks for the warm invite! I love discussing anything wealth focused and this seems like my kind of community!

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Welcome to the family bud.

Keep those wonderful pieces coming!

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@mindtrap-leo thanks for the encouragement! Let's keep learning and moving our pieces on this financial chess board of life!

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"On paper" this looks good @gualteramerelo, but it overlooks some fundamental "structural" issues. One of those being that real estate investment companies may keep buying properties keeping the price UP, but who's going to actually live in the houses/apartments when millions of people have either lost their jobs or have reduced income due to furloughs, or their jobs are hanging by a thin string?

One thing I do see happening here is a major shift between "home ownership" and people renting from mega corporations that hold portfolios of thousands of properties. That could have dire long-term implications for the economy... homeownership is typically people's largest investment, and if you spend 20 years throwing money at rent, you have nothing at the end, while 20 years of mortgage payments give you an ASSET in the end.

=^..^=

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@curatorcat.leo You are absolutely correct about the dire situation this housing pressure is going to put on the middle class and it will essentially wipe out the ability for the lower class to ever own real estate.

As far as the "structural issues" in the article, it's pretty accurate in regards to being able to find tenants, because the government has already passed plans to increase the amount of housing subsidies they will be issuing as well as the consideration of "UBI" or Universal Basic Income.

Essentially the government is going to become the tenant of the future and the landlords will be providing housing to people more heavily. We've seen a taste of what the government does during the pandemic when peoples housing is threatened and we can assume they will likely protect housing and the banks further in these upcoming months.

Either way I think you are right. The situation is very bad for anyone who doesn't have the ability to pay for their mortgage OR for landlords who don't have the ability to remove and replace their tenants fast enough with people who have figured out how to get the money. Very interesting times are coming and it will create opportunities of all kinds. I know I am ready to start collecting rent in crypto and silver, lol

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You are correct, accept for a lot of black swan events that might be landing any minute now.

As long as banks stay solvent, and can weather the non-payments of mortgages, then we will continue to higher and higher house prices. But, there will soon come a time where all the banks fold like a house of cards and mortgages become a thing of the past. Then house prices will be how much cash/trade you can get for it.

Monetary collapse. We are looking at the end of the dollar... but this could go either way as far as housing prices.

Self sustaining communities: Soon, we will see power and water anywhere. Self generated. And then we will see communities formed around this... meaning, being built anywhere. Along with a focus on being energy efficient and passive solar heated, old houses will become obsolete and too expensive to afford. If you are watching for this, you can see it happening, but if you do not know about this, suddenly 10-20-30% of the houses will be for sale.... and then abandoned.

@builderofcastles You bring up some great points and there are some really great books, authors and economists who agree that we are moving towards the end of the dollar. Which is why holding hard assets and alternative currencies is a great hedge.

As far as the real estate changes with technology and efficiency I have to agree with you. I see large migration patterns moving to southern states where it is cheaper to live as well as easier to use solar to heat and cool your home. On my real estate investing side I am heavily focused on finding ways to make sure the properties we are buying are in line with this less centralized future you eluded too and for the sake of planet earth, I do hope that is the direction of the future.

That being said , it will take some time and I fully intend to capitalize on every opportunity we can until the economy no longer needs investors like us to balance things out. #BuyLowSellHigh

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Real estate not crashing doesn't exactly mean that its in a healthy state however, it can remain up with private equity funding take overs and consolidating supply to keep it artificially inflated and suck more rent from the productive economy to the financial economy

The fact that it continues to go up only benefits existing owners and those with access to capital, it will continue to drive homelessness as wages can't keep up

I don't expect a crash either but the practice will have to hit a breaking point like it did in 06-08

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@chekohler you are right man. The wealth gap is getting wider and there is no end in sight. As someone who already owns $5MM in real estate I count myself as being blessed for getting in so early, BUT on the other side of it, even with the $2MM in equity I have to throw around at Real Estate deals I find it harder than it has been in the past to make the deals work.

Of course at this level I am playing in the same sand pits as the guys who use hedge-fund money so they have access to VERY CHEAP capital. We will see what the future holds, and if there isn't a great deal for me then I'll keep building my training and real estate investing businesses on the flipping and rehabbing side. Got to play both sides of the market and hopefully we can employ some of those people who are losing their jobs due to technology and shifting markets.

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That's awesome, always great to learn from someone who has experience and skin in the game, I no zero about real estate.

So if the hedge fund guys are squeezing you out of markets, would real estate investors now look at say outside into the suburbs, lower-income neighbourhoods pushing more gentrification, and then foreign real estate? So guys on your level bid up prices in other markets/less efficient/less competitive markets?

I mean surely if this continues you lift the floor on buyers especially first time buyers to get in and kill off demand? Or will there be 50/60/100 year mortgages issued in the future? Surely there has to be a point where the music stops.

@chekohler I love that you used that expression, "when the music stops". It's something my mentor always tells me. He says, "you have to make sure you have a chair when the music stops" and what he is saying is exactly what you are addressing.

I've always operated in "gateway/depressed" cities, because it's what I know and there is a real reward to fixing up old buildings and giving neighborhoods a facelift and improved living conditions for residents.

I absolutely agree that there is a fine line to how long a market will actually need us as investors. Eventually everything is fixed up and we are forced to find new markets OR we stick to our current markets and get into the gentrification game IF there are jobs in the city to support "gentrification". Not all cities can be gentrified and it's important to remember that RE Investors aren't the deciding factor in gentrification, we are just the effect. Jobs and schools are what drive gentrification. The more jobs you have in an area the more people want to be there and the higher prices go up on rents and housing.

It's the herd mentality and human nature to chase the money. As a Real Estate investor it's your opportunity that is built when you can see a migration pattern and get there in time to help support the newly desired housing.

To your point though, yes, sadly the wealth gap is getting larger and larger, but that is very specifically a function of jobs and technology. There are less and less desirable jobs AND the large corporations no longer need to hire as many people as they did when robots and computers didn't exist. There is a great book on the subject called, "Rise Of The Robots" that gives some real insight into the future of economics, jobs and crypto currencies as well as a small glimpse of real estate.

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Great stuff, been reading far too much of scare mongering articles in the recent weeks. Glad to see someone put some thoughts and take a positive spin on the situation

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@ir-crp You've got the right mindset my friend! I think there is some great information to what some of the fear mongering points out, but we have to also look for the opportunities as investors to help balance out the market and gain a profit for being there in time to provide what the economy is looking for. I see Multi-family being a strong asset class going forward and crypto currencies like the ones we learn about here on #leoFinance being the next social media boom or dot com boom.

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The only way you can lose in real estate is to be over leveraged and be forced to sell in a down market.

I am a renter and receive a monthly pension. At my age I really don't have the ambition to get involved in real estate. I would have to hire a management company, yada, yada.

Having said that, I still enjoyed reading your article even though I have no interest in the topic! Just think of folks searching online for information on real estate! You are going to fit right in with the LEO Finance community.

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@sgt-dan thanks for checking it out and leaving an awesome comment for perspective! You are right that full time investing in real estate can be a pretty active form of income (despite what the gurus say about it being passive, lol).

There are so many aspects of the financial world that Real Estate has a hand in, so it's always good to see what is happening and keeping a pulse on it. Great job on scoring a pension for retirement! What did you do prior to retirement and what are you investing in now? I find there is a lot to learn from people who are investing in retirement.

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🤑 Just a little crypto here and there.

Interesting take on point 1, I hadn't thought of it just like that although I know a lot more are working from home now and like you say, working in the city or office is less of a "thing" now. In the UK though, we have been given a "stamp duty" holiday (i.e. a kind of "pre-purchase property tax") which is lasting until the end of March 2021 on properties up to a value of £500,000. This can save up to £15k in some places. After March, this goes so stamp duty will need to start being paid again at £125k.

I've spoken to my mortgage advisor many times and he did say this is a bubble we're in with covid so I'm expecting 2021/2022 for a slight dip in prices as our furlough scheme ends, the stamp duty finishes and lockdown pent up demand expires.

Either way, mortgage lenders here aren't really giving out mortgages to anyone unless you have a 35% deposit now which favours those with properties already looking to move on. First time buyers may be struggling for a while but shared ownership is an option in the UK.

Great post, thanks for sharing your knowledge and experience - I'll be keeping an eye on the developments of the housing market and bear in mind some of the points you've made. Not sure how different the situation is vs UK though in the US!

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The reasons are pretty acceptable and I agree with them, @gualteramarelo.

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While some would expect for the real estate to crash, I must say that the opposite takes place. Some friends on mind that are living in the city invested in these times in houses outside the city, but the prices were pretty steep. The real estate market didn't go down from what I saw and the prices are still holding, at least in Europe.

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@behiver you are seeing things very clearly my friend! As much as I and everyone else who invests in real estate would LOVE for there to be a solid connection between the stock market as a timer and real estate, there just doesn't seem to be anything real that connects them.

The only real gauge we have would be interest rates and inflation, but even those can be thrown off depending on location location location.

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2021 will be a fine year for a crash. 😎

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We can only hope, lol I know thats what @scaredycatguide is hoping for also!

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Yeah, this is a time when people are realizing that it's better to live further away from the city with their own garden and stuff. Many workplaces now have their weekly meetings in Zoom or other online apps which makes it easier to live far away from the city and still do your work.

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I think this applies to the UK possibly even more so than in the US!

In the UK you can add to the list that people are obsessed with home ownership!

And the planning laws here are even more draconian.

And developers buy up potential development land and just sit on it, and don't apply to build anything if they sniff any indication of a property slump!

That later factor may well be the most important.

However, I would have thought in the US there is far more potential in the UK to move around and take advantage of regional price variations if you want to get on the property ladder, or even develop a portfolio?

That's what I did when I bought my house - I shit you not I correlated the regional property price index with the quality of life index (measures crime, access to schools and so on) shortlisted 6 cities and bought in one of those that I liked the feel of - my thinking was that when people seek to leave London they'll go to one of these nicer outlying places.

I think everyone needs at least one property. Otherwise rent is just someone else's wealth!

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very interesting, I'm in Portugal not the US but it seems like most of what you're talking about applies here as well. I do hope to be able to buy land soon (next year or 2) but we are looking for undeveloped land. Still seeing everything with it's own water source get bought up here though...

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I don't know if this will have much impact. In the 2008 market crash, many properties sat on the sidelines for years before a nonperforming asset market built up. Now that it's an industry, banks can gather a bunch of foreclosed/nonperforming property notes and sell them to hedge funds. The funds will then take the big lumps and break them up into retail sizes for investors to buy.

Say you buy a nonperforming note. You can either take possession of the property and flip it, or you can renegotiate the mortgage with the owner, if they are still living there.

If it's the latter, then there are servicing companies that can take care of the work of taking payments, collecting escrow, and sending late payment notices. Since you don't own the property, you only hold the note, you don't need to worry about maintenance. You just get your payments by direct deposit.

This is all to say that there is now an established route for nonperforming assets to get written off and put back on the market rather than languish on the sidelines. Banks will not refinance a mortgage if you've missed payments. They'd rather sell the note at a discount. They often leave enough meat on the bone for investors to make money refinancing the property or to do owner finance after foreclosure.

In other words, I think any properties in trouble will have a swarm of experienced investors (from the 2008 crisis) able to take the inventory and put it back out on the market without depressing house prices.

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Bitcoin has performed even better than real estate.

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@leprechaun Bitcoin is a great asset to hold and if you can buy it on the dip and sell at the peak you can still stand to make a great profit. Real Estate should still be a part of your portfolio because of the amount of leverage you can use and the cashflow produced by the rents.

When comparing assets like Real Estate to Bitcoin you have to remember that it's all relative to how you purchased the asset. For example, I have one deal where I purchased $2.4MM worth of Real Estate for $900k and used none of my own money, which meets an infinite return.

I haven't yet found a way to buy Bitcoin without using any of my own cash, but I am open to suggestions on how to do it!

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Real estates never crash in price in my country. The price of real estates increase every year. and bank prefer real estates as the collateral asset of lending

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