Refi 'Til Ya Die!
Today’s topic was inspired by a recent comment from a reader
(thanks, Shanequa!) regarding the wisdom (or lack thereof) inherent in our
philosophy of never paying off a mortgage but rather refinancing it every 7 to
12 years. First of all, we’re not here to claim absolute superiority when it
comes to real estate investing strategy. Different strokes for different folks
and all that, but the idea of periodically refinancing your income property
mortgages has worked out quite well for us for a couple of different reasons. Today
we’ll address one of them.
Too many people underestimate the disastrous effect
inflation has on assets in which the underlying value depends on a stable currency.
Hate to be break the news to you, but our currency is about as stable as
Charles Manson. This includes stocks, bonds, mutual funds, and any type of
property you own that has an increasing amount of equity. A quick review:
inflation is simply an economic term that refers to rising prices. The problem with
rising prices is that they automatically reduce the purchasing power of any
asset held in cash.
A simple example would be to pull a single dollar from your
pocket today and go down to the local grocery store to buy a one dollar candy
bar. Take the same dollar to the same store one year later and, if annual
inflation rises to meet the low standard of the government reported rate of 3
or 4 percent, the candy bar will likely cost $1.04 at least.
That’s the insidious aspect of inflation; it devalues your
money, whether it be in the form of stocks, bonds, or equity-heavy rental
properties. The flip side of this discussion is to realize that, while living
in inflationary times (which we most certainly are), the best financial
position to hold is a fixed-rate, long-term mortgage tied to a piece of income
producing property. Pay down that debt too far and you lose your primary
inflation-fighting tool. This becomes even more critical when you realize the
government inflation numbers are vastly under-reported. Remember that they don’t
even include energy and food prices!? We figure the actual number is at least
As the reader who questioned us initially (rightly) pointed
out, you do incur fees every time you refinance, but that’s a small price to
pay when compared to the portfolio-killing effect of year piled upon year of
relentless inflation. And you can forget about the infrequent financial media nattering
nabob who wrings his or her hands over the possibility of deflation. You have
got to be kidding. That’s a red herring the size of Moby Dick. Our future is inflationary.
Stay tuned next time when we discuss the second reason Jason
strongly favors periodic refinancing. By the way, feel free to jump into the
comments and fire away. We love a rollicking discussion. (Top image: Flickr | papertygre)
The JasonHartman.com Team
“The Complete Solution for Real Estate Investors”