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Refi 'Til Ya Die!

Posted on Tuesday, November 27

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.


Inflation


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
10 percent.


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.
Period.


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” 


Comments (6)

  1. Tiny_1399546834-avatar-bit1232

    I'm assuming you are writing about cash out refis. What happens when you refi a property and the new PITI causes you to break even or be in the red for that rental? This is the way I look at it: the candy bar (rental) is perceived as more valuable even if it's not and people have to pay more money (rent) to get that same product. So every few years, you should have a bigger profit due to increasing rent and a shrinking mortgage. The only reasons I would refi was to buy things that will make me money like houses or for emergencies. Besides emergencies, it only makes sense to refi if you can make more money.


  2. Tiny_1399586579-avatar-alewilliamson

    I agree with Ms. J on this. But another twist in fate - if the gvt slashes the mortgage interest deduction - that's is going to sour the sweetness on that phooey tax deduction (welfare for investors) that we all love (just like depreciation). Leaning toward refi less and reduce principle more.


  3. Tiny_1399659196-avatar-tradewindtiger

    I will have to third the motion. Use debt to get started, then hunker down and pay it off. No matter what happens with the powers that be and market manipulation, free and clear rules.


  4. Tiny_1399656930-avatar-jasonhartman1

    All good points, but no one is talking about inflation. I'm afraid it's a more fearsome force than it gets credit for and will erode the equity in your properties AND future buying power more than refi charges. As you mention, Shanequa, I like to cash out a refi and buy more properties.


  5. Tiny_1399586579-avatar-alewilliamson

    Jason Hartman I understand the inflation monster is lurking, but frequent cash-out refi increases your risk exposure geometrically. That is why so many investors allowed the banks to take back their properties. If you were proposing moderation on cash-outs, I would feel more comfortable accepting your guidance. But refi-till I die is excessive - don't ya think?


  6. Tiny_1399656930-avatar-jasonhartman1

    Hi Al, Sorry for the delayed response. Christmas happened, I think. For a more thorough answer to yours and the other questions that have been posed about the Refi 'Til Ya Die strategy, please visit my website at http://www.jasonhartman.com/creating-wealth-30-refi-till-ya-die/. This is the transcript of a podcast I did on the subject and speaks well to the strategy. Thanks for your interest!


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