THIS YEAR YOU NEED A 12% NET NET RETURN ON YOUR REI TO BREAKEVEN

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THIS YEAR YOU NEED A 12% NET NET RETURN ON YOUR REI TO BREAKEVEN

Danny Webber
Real Estate Broker · Austin, TX · Member since 2016 · 834 posts · 449 votes

Am i thinking about this the right way?

US dollar net value drops almost 7% in the last three months

+

An assumed true inflation rate of 5% (shadowstats.com)

Loss of purchasing power 7% + Inflation @ 5%= 12% decline in overall value of the dollar?

So ever dollar you take in for rent is worth .88 cents so far this year. The only upside is low interest rate long term debt is now cheaper to hold due to the devalued dollar. 

Thoughts?

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  • Mark H. Porter
    Investor · SC NC, VA · Member since 2020 · 1k+ posts · 756 votes
    6y

    Hmmmm...my MBA was many years ago but isn’t the depreciating dollar one of the factors of inflation?  It’s already accounted for in the rate.  Dollar goes down, imported goods get more expensive, inflation rises.

    Admittedly, there are MANY other factors at play this year (insecurity In, well, everything due to perceived economic risk) so my example is extremely simplistic.

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  • Danny Webber
    OP
    Real Estate Broker · Austin, TX · Member since 2016 · 834 posts · 449 votes
    6y

    I think the value of the dollar is based on the dollar at 100 on the DXY as a baseline measurement or close to it. If the dollar value is dropping and things are getting more expensive independently for other reasons (supply shock, decreased production/consumption) they should be compounding factors but I am not sure. Meaning, these items are independent of each other in real monetary terms but may correlate and have causal effects if no other aggravating circumstances are in play.

    We need a GOOD macro-economist on these forums to set us straight! I try to make sense of these things and how they affect what I invest in. 

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  • Matt StricklenPro Member
    Investor · Austin TX · Member since 2020 · 227 posts · 152 votes
    6y

    My economics prowess fits in a thimble, so this question is probably out of my league.

    but...

    Is appreciation also an upside along with low interest rates? If appreciation outpaces inflation, are you protecting your dollars?

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  • Steve Morris
    Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
    6y

    "Loss of purchasing power 7% + Inflation @ 5%= 12% decline in overall value of the dollar?"

    I think the 5% inflation reflects the loss of purchasing power, so you're double-counting.

    If its 5%, then your hard asset is appreciating 5% on average, be happy.

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  • Joe Scaparra
    Investor · Austin, TX · Member since 2013 · 680 posts · 1k+ votes
    6y

    Ok the premise, dollar drops 7% in relation to what?  Other world currencies? Other goods and services?   What do I buy monthly?  Food, Gas for the car, insurance for the car, clothes, utilities for the home, Rent or Mortgage?  

    I think the dollar buying power is not related to the value of the DYX, more connected to actual inflation.  Inflation which happens to be very low.  

    Here in Austin the cost of rent is probably the most affected by current market (inflation at the moment).  So for a real estate buy and hold investor I am in a net gain position.  For the year, the only significant rise or fall of the dollar I can relate to is the Rent I collect from my rentals.  I worry not what the DYX has been doing.  

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  • Aaron Gordy
    Real Estate Broker · Austin, TX · Member since 2012 · 1k+ posts · 1k+ votes
    6y

    International economics is applicable, sometimes, imo.  If the dollar drops compared to the Czech koruna does that matter? Probably not. If the dollar drops compared to Asian currencies then is that good or bad? It makes the real estate prices cheaper for the Asian folks. In the 1980s, the Japanese money was flooding the markets as the relative yields in their country didn't look as attractive to them as a NYC building that had bigger yields. So they bought and bought.Did that pay off for them??? Look at the history. In places like Venenzuela where there is a serious financial crisis, folks will park their money in stable countries. Money flows to higher yields and stability. You don't have to be George Soros to figure that one out. 

    Its all relative : )

    If the dollar decreases relative to other markets and the US seems stable then international money will flow in chasing stability and yields.  

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