We Study Billionaires - The Investor’s Podcast Network - BTC164: Bitcoin & Real Estate w/ Leon Wankum

Starting point is 00:00:00 You're listening to TIP. Hey, everyone, welcome to this Wednesday's release of the Bitcoin Fundamentals podcast. Boy, I'll tell you, I really enjoyed this conversation and topic this week. I have guest Leon Wonkham, who's a real estate developer and Bitcoiner. During the discussion, we talk about how the changing interest rate and inflationary environment is drastically changing this highly lucrative and somewhat predictable industry over the last 40 years and what Bitcoin might be offering participants as we're moving into the coming decade. This is a conversation you definitely won't want to miss.

Starting point is 00:00:36 So with that, here's my chat with Leon. You're listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish. Hey, everyone. Welcome to The Investors podcast and Bitcoin Fundamentals. I'm here with Leon, like I said in the introduction, and very excited to have this conversation. So welcome to the show, Leon. Thanks for having me, Preston.

Starting point is 00:01:11 I'm also looking forward to having a conversation with you. So this is a topic that I don't think I've ever covered on the show, but I think it's a topic that everybody is probably most intimately familiar with, which is just real estate at large, and how to think about this in such a dynamic interest rate environment. I want to start off by framing up what I've just observed in my own. real estate, local real estate market. And I think that everybody's scenario on the numbers might be slightly different, at least here in the United States. But let me just talk through like what I've seen and then I want to get your initial thoughts on this. Prior, if we go back to before COVID,

Starting point is 00:01:55 so I'm just taking the start of 2020 and we look at what I would say is a pretty mediocre middle income type house in the area that I live. You're paying $500,000 back at this time in 20,000. 2020, you're paying $500,000 to own this type of house. The interest rate around this time was, let's just say, 3%. And so if a person would make payments at 3% on that house for 30 years, the overall price that they paid for the home after those 30 years was $758,000. Now, today, in this area, that same home is going for about a million dollars. So it has, in those four years, since the start of 2020, and now we're at the start of 2024, that half a million dollar house is now a million. You're dealing with 7% interest rates.

Starting point is 00:02:48 And instead of paying a million over the 30 years, you're now paying $2.4 million for that house. And so when we compare these two prices in just four years' time of $758,000 for effectively paying all the payments on that house four years ago, to paying $2.4 million for the exact same house today, four years later, that is three. One five times more expensive, three times more expensive than what it was four years ago, which is insane, which is totally, absolutely mind-blowing insane for that type of move in four years. you're here to as an expert in real estate, and this is the number I can't wait to tell you, more of the audience, because I know you know this number. But if you would have bought Bitcoin for the value of that $500,000 house back in 2020, that house cost you 70 Bitcoin. Today,

Starting point is 00:03:49 if you bought that same house, which is now listed at a million, that house costs 22 Bitcoin. for a reduction in price of 68% in four years. These numbers are crazy. And I think for people that are, so if you're living in a world of Fiat and you're using leverage, the house got three times more expensive. If you're living in a Bitcoin world and paying Bitcoin for a house, it got 68% cheaper. This is a dichotomy that I don't think the planet can even comprehend. So what in the world do you say to somebody with this?

Starting point is 00:04:27 Like, where do we even start this conversation with those hard-hitting ridiculous mathematics in your face? How do you start this conversation with somebody? How do you even begin to broach the subject, Leon? Not easy, to be honest with you. I take two approaches. So the first approach is for an individual that just wants to save. And the second approach is for a real estate developer.

Starting point is 00:04:52 So company whose business is it to provide housing and build real estate. I think the numbers that you just mentioned pretty much sum up the opportunity cost, saving in real estate rather than saving in Bitcoin, right? Or the other way around, the opportunity cost of saving in Bitcoin relative to... Oh, the other way around, exactly. If you look at Bitcoin, just as a store value, it's a superior store value to real estate, and it deflates at a rate that housing, even if you buy it on leverage and you finance the purchase of a house, you cannot keep up with the deflation of Bitcoin. So Bitcoin has completely

Starting point is 00:05:36 changed the dynamic because people now need to look for a different store of value. Real estate has been the number one store of value for the past 50 years. Since 1971, when the US went of the gold standard, real estate has pretty much become the preferred store of value globally. There was a study by McKinsey that came out in 21, and it estimated that 67% of the world's wealth, around $300 trillion, are saved in real estate. But now that we have Bitcoin, the opportunity cost of putting your money in real estate is just too high, right? So saving a Bitcoin just makes more sense. Now, the question is, what problem, does the spring for real estate investors.

Starting point is 00:06:21 And if you look at the balance sheet of a real estate company, on the liability side, you'll have mostly not only, but you have debt. Because real estate is a very debt intense business. And as interest rates go up, the liability side of the balance sheet is growing. It's growing massively. And now it has another negative consequence, what you just mentioned.

Starting point is 00:06:44 As interest rates go up, financing becomes less afforded. because the cost of financing over time increases. So less people can afford housing, which leads to less demand. And what we're seeing right now already, demand for real estate is going down, which means that prices of real estate go down. So if you're a real estate developer, you're faced with the issue of having increase in debt burden, but at the same time, there's less people willing to buy housing. And I believe it's important, it's very important for real estate investor to bring Bitcoin on their balance sheet, especially millennials in Gen Z.

Starting point is 00:07:26 They have been priced out of real estate already because real estate has become so expensive. And now they can't afford it either because of financing. In order to be honest with you, as a real estate developer, in order to survive, I think you need to bring in Bitcoin on your balance sheet. And I quickly also explain why. Bitcoin has, as we know, excellent monetary properties, and it will increase in price with increasing demand. And the only way to weather the inflationary pressure of the Fiat system as a real estate developer is by owning Bitcoin and participating in the value increase of Bitcoin because

Starting point is 00:08:10 real estate is a very credit intense business. if you're not able to increase your credit worthiness, you're not able to compete. And I believe going forward, banks will understand that those companies that hold Bitcoin on their balance sheet, there will be more credit worthy. And that allows you as a real estate developer to leverage the value of your real estate in Bitcoin,

Starting point is 00:08:37 potentially refinance your real estate by Bitcoin with the additional capital, and build a healthy balance sheet, that allows you to stay competitive because my prediction, it's just a prediction, I don't know, but I believe that a large number of real estate developers will go bust within the next coming 18 months. We can already see it in Europe, especially, but we can also see it in the US. You know, so much of it is an interest. You say it's capital intensive. You're using lots of leverage to do this.

Starting point is 00:09:11 It comes down to your creditworthiness. And as you're trying to play this, when a person hears those numbers that I spouted off at the beginning of the show, they're saying, well, if interest rates go back down to the 3% level, based on the price doubling, I would want to buy more real estate again. I guess this question is very speculative, but it gets to the essence of what a naysayer who's hearing that start of the show would be saying is, well, once interest rates come back down, I'm going to buy again, and then the prices will double when I'll make out like a bandit because I was highly lever. What is that person missing when they're thinking about like what the trajectory of the next five, 10 years looks like, knowing what you know about real estate and Bitcoin combined? I try to make an educated, educated guess. So number one, for the foreseeable future, I don't believe that interest rates or mortgage rates come down back to 3%. Inflation is just too high.

Starting point is 00:10:07 You need interest rate at a 4% or 5% level in order to deal with inflation, that's number one. And number two, we are witnessing a paradigm shift. Why is real estate so expensive? It's not so expensive because of its utility value. It is so expensive because it has been priced away from its utility value. There's a financialization process that happened with the asset of real estate because as money loses purchasing power, people are forced to invest into scarce assets. And real estate has been the scarcest asset that has been accessible. But, But now we have Bitcoin. Bitcoin is a much better store of value.

Starting point is 00:10:48 So I am assuming, I'm assuming, that most of the monetary premium that sits in real estate, and it's up to 70% in the US and in Euro, up to 70% of the value of real estate is the monetary premium it carries as a store of value. I believe as Bitcoin comes into the equation, that monetary premium will eventually, over time, into Bitcoin, real estate will collapse to its utility value, and the deflation of Bitcoin will be a multiple times higher than the money that can be made with real estate. Even if interest rates go down to 3%, and I like to give an example, the following example that they usually give, because we are a real estate development company in over

Starting point is 00:11:35 the past three years, I had to deal or write reports for our employees and also for the people that I work with, helping them to understand why we need to integrate Bitcoin into our business. And the example I like to give us in 1995, if you are running a shop on a high street, you were forced to learn about the internet

Starting point is 00:11:58 because e-commerce came in and e-commerce as a business model disrupted your business model. And I believe that Bitcoin is disrupting the real estate business model similar to how e-commerce disrupted the retail business model. And similar to how email is now the preferred way of sending information, I believe Bitcoin will become the preferred way of storing value.

Starting point is 00:12:25 At this point of time, the preferred way of storing value is real estate. And because Bitcoin is superior as a store of value, it's scarcer. It is highly liquid. You can move it in times of crisis. It is difficult to tax and to destroy and cheaper to maintain. Bitcoin is in direct competition to real estate in its function as a store of value. Yeah, I totally agree with you. From a practicality standpoint, if I, let's say I have multiple apartment buildings

Starting point is 00:12:57 and that's my primary mode of business is real estate. And you have a big choice. You have a large amount of capital expenditure to sustain these properties. And the big question that I think a lot of these developers run into is the tradeoff of sustaining the business so that you have a very high occupancy level because people don't want to live in a spot that's not highly maintained and well taken care of. So you've got to plow a lot of that cash flow into depreciation costs to sustain these properties so that they stay, you know, people in them. What percent, and I know that this is a case-by-case basis type question,

Starting point is 00:13:38 But from a rule of thumb, I guess, is where I'm going with this. What would you say the rule of thumb is as far as plowing free cash flows into Bitcoin for these developers versus buying new properties that might be advantageous because of scarcity of land and school districts and all of these factors that weigh into valuable real estate property and the sustainment of existing properties? Like, there's a lot of variables there to kind of. kind of juggle. So like, what's your guiding principles for a person that's trying to manage all of this? Sure. I can give an idea of what we did over the past three years, and then people can take it as they like. So a year and a half ago, about 18 months ago, we decided that we will

Starting point is 00:14:28 not buy any new properties because it has become basically a bad business model with rising interest rates and we've decided to allocate 25 or 20 to 5% of our profits that we've made by selling real estate to invest that into Bitcoin. So we took actually, I think 20, 25%, it's quite a lot. But we as a company and me as an individual, I believe it is important to basically participate in the deflation of Bitcoin that is going to accelerate, especially the upcoming half. In April, there will be the next halving. And as the harving kicks in and we have a supply shop, we believe that Bitcoin will deflate very fast, especially with the ETF prospects coming in.

Starting point is 00:15:19 So we decided to allocate 25% of our profits into Bitcoin. And then I'd like to add something because you said something that I very much agree with. And I think that's a very valid point. You mentioned maintenance reserves. It's very important to maintain your property in order to keep up the value. But the inflationary pressures of the Fiat system, they're so strong that will become almost impossible to do that.

Starting point is 00:15:46 And ESG requirements, they are kicking in globally. And we, for example, we now have to renew some of our windows. So this is the broken window fallacy actually at play. We have to renew some of our windows because the German authorities believe it is necessary in order to save energy, even though it has a higher energy expansion doing that, then the energy that can actually be safe. So now the question is, how will we be able to finance that? And we also decided 20% to 25% depending on the individual properties, we'll allocate to Bitcoin

Starting point is 00:16:23 and we build maintenance reserves for each individual property in Bitcoin. So that is money that we can leave there for, let's say, a decade. and we participate in the deflation of Bitcoin, and we will be able by doing that to maintain our properties because it is also not possible to sell our properties because we incurred large debt in order to build these properties. And we need the cash flow to pay back the debt. Wow. Very, very interesting. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer.

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Starting point is 00:21:30 in order to deal with all these maintenance issues. So the rest, we're just sitting on it, to be honest with you. We believe by allocating 20 to 25%, depending on the individual properties, to Bitcoin, we actually hatched against inflation, right? Bitcoin deflates so fast that we take the opportunity cost of having those 80 to 75% sitting in cash to be able to pay for ongoing costs

Starting point is 00:21:56 because the ongoing costs are increasing, especially energy. Energy is becoming more expensive. Give us a rundown from the different types of real estate, whether it's commercial, residential, kind of go through that, just break it down for us and how maybe a person should be thinking about how Bitcoin should be incorporated, not incorporated for these different parts of the industry. Yes, I'd love to. I personally, I focus on residential properties, so commercial is not my expertise,

Starting point is 00:22:26 even though I also deal with commercial real estate, but by a rule of thumb, I believe the rules apply to both to residential and to commercial. So number one is the active decision to not invest parts of the profit in real estate, but rather invested in Bitcoin. Number two, the maintenance reserves that we just discussed. And number three, which I believe is a very important strategy going forward, refinancing and leveraging your real estate into Bitcoin. Obviously, the game plan that Saylor has laid out where he's using a company that generates cash flow in order to incur debt to buy this inflationary currency, which is Bitcoin, pay back the debt in an inflationary currency, which is the dollar, real estate investors can do

Starting point is 00:23:17 the same thing. So I believe that real estate is the perfect collateral to incur, your debt to buy Bitcoin because you can pay back the debt with the rental income and you are not dependent on the asset Bitcoin, which is very volatile, to pay back the debt. So we personally, at this point in time, we are developing strategies to take on debt on our real estate and also to refinance the real estate because the real estate that we have bought both residential and commercial five to 10 years ago has risen significantly in price. So now, usually what do real estate investors do?

Starting point is 00:23:55 They refinance their properties. They take the additional cash. They buy more real estate. What I'm suggesting, and I know there are products being offered to the market very soon, if you own real estate, you want to refinance your real estate, take the additional cash, buy Bitcoin with it. Don't reinvest it in real estate. Maybe wait five years up to a decade to see how the real estate market is going to develop.

Starting point is 00:24:20 if a decade is too long for you, wait till after the halving. In 2025, then you can reconsider investing in real estate. But my thesis is, and I think, Preston, you would agree with me, over the next 18 months, Bitcoin is going to outperform real estate. Bitcoin is most likely going to outperform any type of asset in the legacy financial system. So in order to take advantage of that, refinancing take the additional cash by Bitcoin. However, it's important to pay attention to the interest rates. Interest rates have gone up. So if you refinance your property, you need to make sure that you can carry those higher interest rates. So this is a strategy that has to be assessed on a case-by-case basis, but I believe generally applying the strategy that Sailor has applied to

Starting point is 00:25:11 micro strategy onto a real estate portfolio is very smart. I think when you look at what you just said, like I totally get what you're saying. From a math standpoint, I agree with the hypothesis. But I think for a lot of listeners that would hear that, they would probably be very opposed to the idea. And I think that they would be opposed to the idea because they're looking at it from their own, their house. And they're looking at the risk of, I could lose it all, because they're looking at the risk of, I

Starting point is 00:25:40 could lose it all because I'm refying into a higher interest rate than where I was already at to buy this what is a very speculative. And I'm using the word speculative because it's high volatility, this highly volatile thing. And that's not something that I ever want to put my family and loved ones in that position. Where I think you're looking at it from a different lens than probably the listener that just heard that, you're doing this from a business standpoint. You're not doing this from this is my home and this is where my family lives. But I think a lot of listeners are hearing it from there. And I know Michael talked a little bit about this idea during the last bull run. And there were tons of people coming out, especially in the bear market, saying that was

Starting point is 00:26:26 very irresponsible and something that should have never been said because the listener might not be in the same frame of mind or context as to like what Michael was doing with his. And by the way, He's not borrowing money to buy Bitcoin. He's just issuing more shares because in his mind, the multiples don't make any sense. And what's so fascinating, I know this is way off topic, but I find it really interesting, is he's debasing the amount of common stock that he's got. He's taking that cash. He's buying Bitcoin with it.

Starting point is 00:26:55 And when you look at the performance in a per share basis, each one of these shareholders have more Bitcoin to their shares than what they had before he did it. And he's able to do this because his companies at, I don't know, a PE of 30 or 35 or whatever, and Bitcoin's undervalued. His company, in his opinion, is overvalued relative to where he sees equity markets going in the coming five to ten years. He's been very right about going about it this way. And you know what? What's interesting is, in a way, you're saying the same thing, but you're saying it from an equity, a real estate equity play as opposed to an operational intelligence company's common stock that's publicly traded

Starting point is 00:27:38 kind of way. And I think that you're obviously talking about more leverage and a little bit more interest rate sensitivity than what Michael's doing with his common stock on a publicly traded company. So I want to throw that – I personally want to throw that out there because a lot of the times when you're having a – in what my opinion is that this is a very high-level financial engineering type conversation, the people who are hearing it are hearing it from their point of view and not your point of view or my point of view. And there's a lot that can be lost in that translation when you're doing it. So I don't know if you have anything else you want to add on that

Starting point is 00:28:16 particular topic, but I think that's an important footstomp for listeners that might be only looking at it from their homes value or that point of view. No, I agree with what you said. I have nothing to head. You're right. You got your start in Bitcoin back in 2015. And you were taking a Mises philosophy and ethics class or degree when you stumbled upon this topic. Tell us about this orange-pilling event for you. What brought this on? Yeah, it was a journey with a lot of ups and downs, and it took me some years to trust my intuition.

Starting point is 00:28:54 I actually learned about Bitcoin a little bit before that because there were certain websites that were popular amongst the student body. I was studying philosophy and ethics and business management, so I did a joint, joint bachelors. And a friend of mine has told me about, he told me about Bitcoin, basically. He mentioned it in a conversation and he said he's using it on some websites to purchase certain goods. And that intrigued me, basically. I was always interested in the internet. I was always interested in finance.

Starting point is 00:29:24 And that really intrigued me. And then in 2015, a friend of my father, who was a venture capitalist, He basically told me about Ethereum. He said there's going to be an ICO of this guy called Vitalik. And he's going to launch something similar to Bitcoin because he knew I was interested in Bitcoin. But at that point of time, I was interested in Bitcoin as a censorship-resistant payment network.

Starting point is 00:29:50 I was not looking at it as money, store value, anything like that. I had actually very little knowledge of what money is and how important the function of storing value for money is. So I was looking at Bitcoin as a censorship-resistant payment network, and I got into Austrian economics and Rothbard and Mises, and I thought, you know, finally, we have something here that the state can't interfere with. And then when he told me about Ethereum, I said, what's actually, what is the difference? Ethereum at that point, you know, they changed the narrative usually, but at that point, they marketed themselves as a world computer. I was like, you know, what does that even mean? So then I decided to write my master thesis on Bitcoin. to really dive deep into Bitcoin and to understand Bitcoin. And I looked at Bitcoin from the perspective of Austrian economics and methodological individualism and the potential that Bitcoin holds for the remitence market

Starting point is 00:30:43 and for individual freedom. Those are basically the two tenants that I looked at. And in 2016, I got into real estate development. And then as my journey in real estate sort of continued, I started to question why has real estate become so affordable? And then I said, why? Because it's a store of value. And then I thought Bitcoin is also a store value, but it's actually a much better store of value than real estate. And then I looked at the market cap of real estate. And I said, if real estate has become so valuable, it's because it is used as a store of value. and Bitcoin is a much better store value, Bitcoin could potentially grab a significant portion of real estate markets cap.

Starting point is 00:31:30 And that's when I really, that's when it really hit me. I was like, oh, wow, this is not just a form of payment. This is near perfect money that potentially is going to drain real estate of the monetary premium. It has accumulated. And then in 2020, Saylor came along. And he talked about Bitcoin as digital property and all the, leveraged plays that he laid out. And those leverage plays, as you mentioned, that's part of the

Starting point is 00:31:57 real estate business. The real estate business is basically a leverage play where you incur debt in Fiat, an inflationary currency, and you buy an income producing asset that is scarce, that protects the value against inflation and use the cash flow to pay back the debt. So what Saylor said resonated with me very much. And it helped me to understand the potential of Bitcoin, And that's when we decided we need to develop Bitcoin strategies for the business. You know, the one thing that I really toy with because I think that you're right, interest rates are going to be higher. Like, we're not going back to 2, 3 percent interest rates for home loans like anytime soon.

Starting point is 00:32:36 I think that they could maybe come down in the next six months from a very speculative opinion, right? But I think four years, like we, you know, all those numbers that I threw out over the last four years. If we jump four years into the future, I think you have a very similar dynamic play out once again where prices could go even higher just because of the sheer amount of monetary units that are being added into this global game. But like you've highlighted so well, this doesn't mean that in Bitcoin terms, the value, the buying power of these real estate properties are going up. In Fiat terms, sure, yeah, they're going higher. But in Bitcoin terms, I mean,

Starting point is 00:33:20 if the last four years is any demonstration of that, even though the house doubled in Fiat terms, the Bitcoin price was down 68%. So going forward, I guess the question I got, going forward, are we going to see the shock, the COVID shock that we just saw? Is this something that's systematic that's playing out? Or was that just kind of a one and done kind of thing and maybe things will normalize? Interest rates will be a little bit higher, but not clear up to seven or eight percent. Because I think that that's an important consideration for people that are looking at this and just trying to manage the risk of maybe putting on a little bit of a position of like what you're describing if they're doing it personally.

Starting point is 00:34:07 And like I answer a question shortly, I'm just going to make a comment to what you said, because you said something that's very important. The question is, what is a unit of account? If Bitcoin is a unit of account, like you mentioned, it's going to be very tough for real estate to outperform Bitcoin. But at the same time, I'm not diminishing the importance of developing real estate. Neither am I diminishing the positive returns that can be achieved by buying and building real estate on leverage.

Starting point is 00:34:36 And we personally, we still develop real estate. So I have not stopped developing real estate. I just believe that Bitcoin, because of its superiority as a store of value, needs to become part of the strategy of any real estate developer, really. And then to answer your question, I believe we are most likely, we most likely will experience a decade similar to the 70s, right? So I think that what we experienced through COVID, the shock and the supply of money that has entered the economy, I think first of all, that is something that might not happen

Starting point is 00:35:13 in the next two to three years because of higher interest rates that are important, just like in the 70s, to bring down inflation. But the field system has reached a point where interest and debt and the interest burden has reached a level where we need to continuously create more money, right? We need to continuously create more money. And this also means if interest rates will come back down in a couple of years, that real estate development as an investment will maybe become attractive again, that will maybe happen. But because Bitcoin as a unit of account is going to deflate much faster, much faster than even real estate can if we have new money entering the economy. I believe at this point in time, if you're a real estate developer and I am a real estate developer, and I am a real estate developer,

Starting point is 00:36:04 If you want to survive, you need to integrate Bitcoin into your business in some way or another. I think that people in your industry, it's going to take them some time to figure this out. I don't think they're anywhere close to figuring this out right now. I completely agree with your thesis. I think you're very right. But if I lined up 100 people from your industry, I think there might be one to five of them that see this from the point of view that you see it right now. What is it going to take for more so that you have 30, 40, 50% of them to really start waking up to this idea that this inflation is going to eat them alive?

Starting point is 00:36:44 The CAPEX for sustainment, the depreciation expense that is often very, very lumpy when dealing with the sustainment of properties. And I guess that would be my response as to why I think it's going to take them so long to figure this out, especially ones that are building new properties. and whatnot is they say they're budgeting for that depreciation expense, but like when that big bill shows up 10, 15 years later, oh, I got to put a new roof on this property. I've got to do these types of things. That's when it really starts to have a massive impact on their ability to sustain the properties and to sustain their business model because this inflation is like a snake that just like chokes out the person who's trying to do it. Is that the reason why? What do you think the reason why it's going to take, I guess first of all, do you agree that the industry is way

Starting point is 00:37:35 behind in figuring this out? And then the second question would be is why? I agree with you totally. There's a few guys in the Bitcoin scene that I've met or I've talked to that were real estate investors as well and they now became Bitcoiners. I think naturally Bitcoin is something that should appeal to real estate developers because the nature of the real estate business is based on recognizing that we live in an inflationary environment, you need to borrow money to buy a scarce asset, right, pay back the debt with the cash flow. I think that there's two things that will have real estate developers to understand the importance of Bitcoin. Number one, it's pain. And the pain is starting. The pain is starting because interest rates have gone up,

Starting point is 00:38:19 those developers that have not fixed their interest rates and that are now faced with a higher interest rate, but rents can't keep up with inflation. They are already feeling the pain. Some have gone bust in Europe. Their real estate developers with a building pipeline of 15 billion have gone bust in the last six months. So they are feeling the pain already. Basically, over the last 10 years since 08, real estate was almost like printing money. If you were considerably intelligent, it was not difficult to make money in real estate development, but that is changing now. It is more difficult to make money. And real estate developers, they can feel the pain now.

Starting point is 00:38:58 They can feel the pain. And the second thing I'd like to mention is the price of Bitcoin because real estate developers are investors. They like to make money. And if you have not thought deeply about why real estate has appreciated since the Nixon struck in 1971, you would be, it would almost be impossible for the individual to understand that Bitcoin as a store value competes with real estate. But once they see what's going to happen after the next halving, the supply shock in the

Starting point is 00:39:32 high demand through the ETF space that is going to come in, they will look at Bitcoin differently because right now it is very difficult for me to explain to real estate investors why they should own Bitcoin because what are they telling me? Oh, it has lost purchasing power. They don't have a long-term view of understanding that it will actually overtime increase in purchasing power, possibly outperform real estate and give you more credit worthiness to refinance your real estate. So I believe that I am or we are early in this development, but we are not going to be the last ones and the pain has to increase and the recognition of Bitcoin as a need. a perfect store of value has to kick in, and that will kick in once Bitcoin hits 80, 90 or 100K. Then the conversation will completely change.

Starting point is 00:40:27 Sometimes now, if I talk to real estate developers and I suggest to them to implement Bitcoin strategies in their business process, they literally think I'm crazy. What are you talking about? This is a bad store of value. It was at 69,000 just two years ago, and now it's at 40,000. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your

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Starting point is 00:44:24 you didn't even have to be extra intelligent, if you were reasonable, right, and you were in this space, you could pretty much kill it. And it had so much to do with that interest rate tailwind of rates always going down for 40 years. I'd be really curious, going back and studying this period from the 50s to maybe 1981, through that period of time where you had this rising interest rate environment, how was the real estate industry dealing with that by putting something on the balance sheet to offset that rising inflationary cost of this massive amount of CAPEX to sustain buildings. Were they doing it with really high quality marketable securities?

Starting point is 00:45:07 I know there was no S&P 500 ETF back then, but were the ones that were really successful through this, what I would describe as a difficult period of time, 30 years of difficult rising rates, interest rates, what were they doing with their balance sheet to be able to afford and sustain properties through that period of time? I don't know if you know that answer. I just would be looking to that as maybe a parallel to what the coming 10, 15 years might be. I'm with you. I think Bitcoin's the best thing that a person could own to offset that. But if somebody's listening to this and maybe they're not as hardcore Bitcoiners as we are, maybe the answer for them might lie there or maybe a somewhat of a hybrid of whatever that was

Starting point is 00:45:55 and Bitcoin. But I would suspect it was high quality equity, publicly traded marketable securities. Yeah, I indeed, I'm not able to answer that question, but something that is interesting in the 70s, even though interest rates were considerably high, real estate on a year-by-year case rose around 9% in the 70s. I think it's just an interesting step. But I would not be able to answer a question, but I would still like to add a comment to a list.

Starting point is 00:46:25 If you think about what Bitcoin is, Bitcoin really, it's an ETF on the global ingenuity. The smartest and brightest people in the world, they are starting to adopt Bitcoin. And if Bitcoin is going to become what we expect it to be, it will somehow or some way serve as an index on global productivity. If it's the main store value that people use,

Starting point is 00:46:50 and if it's the network to settle transactions, then at some point in time, Bitcoin is going to be an index on global productivity. And I like to use the analogy of calling Bitcoin an ETF on the global ingenuity, because by owning Bitcoin, you participate in the productivity of everybody who's using Bitcoin and it's innovative people in the world,

Starting point is 00:47:13 tech companies. So there's not necessarily, from my perspective, just from my perspective, there's not necessarily a need to hatch with any other instrument because Bitcoin is such a great instrument and it allows you to participate in the productivity of everybody who is using it, which are more people, more companies, and potentially in the future, most of the companies and most of the individuals. Most people are familiar with PE ratios when you're talking about publicly traded stocks. So much of the S&P 500 and all these companies that are just highly capped are probably around a PE of 30 or 35. And for people to understand what that means in return, just take one divided by 30 or 35.

Starting point is 00:48:02 And that tells you the percent that they would be expected to make based off of the purchase price. So let's just take PE of 25 because that's really easy math. If you have a PE of 25 for a publicly traded company, you're expecting maybe a 4% return by buying that company at the current market price. I'm curious, and I know you guys talk cap rates in real estate, but what PE ratio would you say a lot of the real estate that you're looking at today is currently priced at? And the intent that I have for highlighting this is just the kind of first of all offset that the difference between maybe private real estate markets that aren't in the public domain,

Starting point is 00:48:40 what type of returns you're getting there? And where I would really like to hear your comments is you had made the comment about Bitcoin potentially stripping monetary premium out of the real estate market. What do you think that these PE ratios could potentially go to in 10 years, 15 years from now with Bitcoin kind of doing what it's doing? That's a good question. I know that one property that we've sold in November of 2021 at the time, it had a P ratio of 32. Wow.

Starting point is 00:49:13 I'm saying wow, because that's a really high capitalization rate for something that's not in public markets that's like super high quality equity. Yeah. That's hot. No, absolutely. I agree with you. And the buyer was a pension fund. And the pension fund, they literally called us that, hey, guys, listen, we know you don't want to sell. the property, but we need to spend money. We've got X amount of cash. We need to invest until

Starting point is 00:49:38 the end of the year. We've got pressure because of at that point of time, he still had low interest rates. And they just wanted to place their money somewhere. And they had around the two, they calculated with like 2.3% return on a year by year basis. That the same property, we talked with the agent who helped us sell the property right now fell down to a ratio of like 22, 23. Wow. So it's already, you're already seeing that monetary premium sucked away. But where does that end? Like, what level do? I have opinions on where I think this goes. I'm curious what your opinion is. I'm also interested in your opinion. But I can make an educated guess. Let's hear it. Let's hear it. If you now bring in, if you now bring in also Bitcoin as a unit of account, it makes things even worse, right? Yeah. I believe that eventually, if, if, right? I mean, this can take out decades, decades to play, and it's just an educated guess. And I have, it can be problematic trying to predict the future.

Starting point is 00:50:41 So I'm just going to take a guess here. But this can go down to 10 or maybe 5. Yes. I have the same exact opinion. I think within 15 years, we could see high quality equity priced at a P.E. A 5 in Bitcoin terms, right? If we're really moving towards a Bitcoin standard and unit of account around the world, I think a lot of this could actually even get to like a P.E. of five with maybe that being an overreaction and maybe normalizing between a seven and a 10 with pricing and capitalization. It's not going to be 30. It's not going to be 35. There's just no way. And I think Michael's, when you look at Michael Saylor and what he's doing with the micro strategy, because he did. He started off very, you know, doing debt. It was really low interest rate convertible debt that he was doing. But now he's just literally, literally.

Starting point is 00:51:31 just selling shares and converting this. And what he's really saying and screaming to the world, in my opinion, and he never said this to me, this is just Preston Pish's opinion. I think what he is screaming to the world through his actions is a P.E. of 30 and a P.E. of 35 is laughably overpriced in a Bitcoin world. That's what he's indirectly saying to everybody. And it seems like you agree. Boy, it's going to be excited. If we're right, right, if we're right, oh my God, this is going to get wild. This is going to get wild. Very exciting. Very exciting for people who do want to own equity. I want to own equity. I just want to own it at a price that I think is reasonable and with a unit of account that's not going to be the base like crazy. Any other thoughts?

Starting point is 00:52:21 Well, I fundamentally, the last comment you just made, I think that Bitcoin as a, it's the first finite resource next to time that we have discovered in our universe at least. So once this unit of account comes in, it changes the dynamic of every single asset in every market. And I think that the real estate investors, because of the low interested environment, they had known, necessity to look at Bitcoin because owning real estate was almost like printing money, they are now faced with higher interest rates, lower profit margins, inflationary pressure, and now these people are coming into Bitcoin. And I think it's going to be interesting because next to debt, it's the largest asset class in the world.

Starting point is 00:53:12 Once these people understand Bitcoin, there's going to be a lot of capital inflow into Bitcoin. And we can already see the data relay, you know, Swiss-based Bitcoin exchange. They recently share that 75% of their OTC trading volume is by real estate investors from Switzerland and Germany that divert or diversify their profits into Bitcoin. And I'm just excited for what's to come, to be honest. I'm so excited too. This was a thought I had as you were saying that. Do you think that it's going to become commonplace for any type of debt issuance to have some

Starting point is 00:53:52 type of Bitcoin backing, whether it's 1 to 5% to even be saleable and liquid in the market, call it 5 to 10 years from now? I can imagine that. I think Saylor at BTC Innsbruck, which was a Bitcoin conference here in Europe, he mentioned that as well. And I think that is a very good point. I agree with that. As a near perfect store value, Bitcoin is going to find its way into any type of debt product.

Starting point is 00:54:21 I can very much see that. And that also, that's a lot of capital inflow to be expected. Yeah, yeah. And I think the really hard part for the market to kind of wrap their head around is I think the higher the price of Bitcoin goes, like if we're dealing with $500,000 Bitcoin versus the 45 that we're at right now, that percentage would have to be significantly higher. So like if you're issuing a bond, then I think for it to sustain its value, you would today would need about 1% of that bond to be like some type of Bitcoin inside of the par value that's paid out today. And I think at $500,000 Bitcoin, you'd need 10% of that issuance to be in Bitcoin as far

Starting point is 00:55:08 as the payout at the maturity. You know, I don't know. it's going to get interesting. And people who can't figure out where the new unit of account is and what the math is are kind of really kind of, I think it's going to have a lot of people confused here in this incoming cycle. I think it's going to confuse the living hell out of a lot of people. Absolutely.

Starting point is 00:55:30 And at some point, you know, Bitcoin is going to take over. I mean, this is also just a thought. But as you said, as the price of Bitcoin grows, the ratios grows in which you need to hold Bitcoin. At some point, Bitcoin is going to be so valuable that people will only accept Bitcoin or even in that debt product. And something I'd just like to mention when we talk about real estate financing because it's also so debt intense. If I would be a bank and I would finance a real estate developer, what I would do is the following. Let's say somebody needs $10 million or in order to finance a project, I would give $11, $12, $13 million. dollars. And with that additional one, two, three million, I would require the real estate developer

Starting point is 00:56:15 to buy Bitcoin and hold it. So once you start developing the real estate, you already hold Bitcoin on the balance sheet as a hatch against two things, hatch against inflation, hatch against the monetary premium beam drained into Bitcoin. And also you build your credit worthiness in case you need to refinance in the future. So I envision a future where real estate development and real estate financing will also include Bitcoin. That is such a profound thought. I never even thought of it from the monetary premium reduction in addition to the inflation hedge on the. I know one thing.

Starting point is 00:56:51 If you're issuing loans and you're a bank, I hope you're paying attention because I think to the common person, we sound absolutely nuts to them right now. But I think for people who understand Bitcoin and like where it's going in the coming four years, good Lord, this is about to get crazy. This is about to get crazy. Leon. I love this conversation. I think it's because it's a conversation that I've had privately, but I've never had publicly on publicly on the show. And I find these ideas just fascinating. You are a wealth of information. If people want to learn more about you or anything that you want to highlight to the audience fire away. Let them know what's up. Yeah. First of all, I enjoyed the conversation also, and I can only return the compliment to you. So thanks for having me. If you are a bank, you want to talk to us, One West Development is our company. If you just like to learn about real estate and Bitcoin, I share articles in Bitcoin magazine,

Starting point is 00:57:55 so you can look them up. And I have a newsletter, just called the Bitcoin newsletter, It's a substack where I write about Bitcoin real estate. I share my thought process and also share our strategies. So feel free to do with those strategies, whatever you feel like. What's the size of one West, Leon? The size. From a market cap. Yeah.

Starting point is 00:58:18 Yeah, we are considerably, I know, we are like a mid-sized business. We are eight people. And right now we have around like 60,000 square meters under construction. so a few hundred units and we usually keep the real estate so we maybe do one deal a year to finance employee costs but usually we order the real estate

Starting point is 00:58:40 which also is a mindset that obviously was easy for me to apply to Bitcoin. I think you guys are going to crush it in the coming decade and I wish you tons of luck and thanks again for making time to come on the show. Thank you for having me.

Starting point is 00:58:58 If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for We Study Billionaires. The Bitcoin-specific shows come out every Wednesday, and I'd love to have you as a regular listener. If you enjoyed the show or you learned something new or you found it valuable, if you can leave a review, we would really appreciate that. And it's something that helps others find the interview in the search algorithm. So anything you can do to help out with a review, we would just greatly appreciate. And with that, thanks for listening and I'll catch you again next week. Thank you for listening to TIP. To access our show notes, courses or forums, go to theinvestorspodcast.com. This show is for entertainment

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We Study Billionaires - The Investor’s Podcast Network - BTC164: Bitcoin & Real Estate w/ Leon Wankum

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