Updated almost 5 years ago on . Most recent reply
Best Savings Vehicle?
What's the best type of account to stack and build my investment capital💰for the next 3 years?
Most Popular Reply
Earlier this year, I took out a 30 year mortgage on a new rental property. The interest rate was 3%. The interest is tax deductible, so assuming around 25% tax bracket, that equals 25% of interest paid is returned in tax benefit. Take 25% off that 3% interest and I am paying effectively 2.225% in interest for the loan. The target inflation rate is 3%, but the fed has stated it could be higher in 2021. Let's say inflation is 3%, which means a year from now my dollar actually has 97 cents worth of purchase power. Translate that to loan repayment. Every dollar I pay back to the mortgage is worth 3% less every year. So in 2022, I am paying $0.97 and in 2023 I am paying $0.94. So you look at the numbers and I am effectively paying 2.225% per year but paying back each year at 3% lower than the previous year.
Look at this another way. Why does the fed target inflation in the first place? One of the main reasons is so that the national debt can be paid back with dollars that are worth less money. The fed has stated without high inflation, there would be no way to keep up with national debt payments. It is especially important with all the pandemic related debt spending.
Everyone is worried about inflation, but if you have massive debt, it is actually a good thing during inflationary periods (assuming low interest rate). In the case of a real estate investor that debit is producing cash flow. Inflation also causes housing prices to increase, so not only do I benefit from the loan, but also from an appreciating asset.