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The Crypto Downfall?

I’m sure you’ve heard the news of late. Sam Bankman-Fried founder of FTX went from being a billionaire to less than $3 in his bank account almost instantaneously, while losing countless dollars for notable investors such as Tom Brady, Shaq, Larry David, Stephen Curry.

Ftx was a cryptocurrency trading platform, and right now is the biggest debacle of the crypto world. How did this happen? While I don’t pretend to know all the answers or details as to why or how could something like this  happened, I can tell you ONE THING FOR SURE..

They weren’t investing in HARD ASSETS THAT PRODUCE CASH FLOW. That’s it. It’s as simple as that. Multifamily real estate is a necessity that people need, and if you have conservative underwriting that plans for potential vacancies and people unable to pay due to loss of jobs and the property still cash flows then you are good.

Historically real estate has appreciated consistently over the years. What’s even more impressive is how Multifamily has historically been stable through economic downturns (more then pretty much any other asset class). Granted there are investors who have been over-leveraged and lost their properties. That is due to a different mindset. The mindset of investing for appreciation and not cash flow. At PQI, we underwrite strictly for cash flow and aim to increase the net operating income through increasing income and/or reducing expenses. This simple concept allows us to FORCE THE APPRECIATION without any changes in market conditions. In fact market conditions may very well get worse but the improved NOI can keep us at the same same or slightly better property value.

In short, the cryptocurrency market has been all about appreciation not about consistent cash flow. While it’s not completely a bad thing it is important to know the risks and differences in investing. While appreciation can be amazing when it happens we fortify the foundation first and invest for cash flow from day-1. Only once we have secured this do we then move to the next step.

Increasing the Net Operating Income Forces Appreciation 

Increasing income and/or decreasing expenses creates a higher net operating income for the asset. If capitalization rates stay the same or slightly increase due to less buyer demand that still creates a hedge to be at same or even slightly higher property value.

“Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most.”
—Peter Drucker

New entrepreneurs may see profit as a marker of a successful business, but cash flow is what keeps the lights on. This is a more accurate marker of the asset’s success in its early stages than the amount of money you bring in, as profit only tells one part of the story..

We hope to hear your thoughts on what you make of the recent crypto scandal and what are your investment philosophies.

Till next time,
Matthew William Guerra

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