The impact of high inflation on long term note investment

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The impact of high inflation on long term note investment

Charley Gates
Investor · Meadville, PA · Member since 2021 · 75 posts · 45 votes

Hello.  This is my first post on BP!

I am new to the note investing world. To date, I have done traditional ‘buy and hold’ rental property investments. I currently own no notes, but I am interested.

I have a question about high inflation.

In the world of ‘buy and hold’, it is advantageous to use leverage and to carry debt from the bank (assuming a cash flow positive investment). This is even especially true in a high inflation environment. Inflation is helping to erode the debt.

In the world of note investment, does high inflation impair the real return on investment (compared to the nominal return) for the long-term note investor?

Thank you for your thoughts.  Best regards.

Charley

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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
4y

@Charley Gates

Inflation has an impact on any yield type of offering, but what is also not mentioned is that in inflationary periods real estate values typically increase. If you hold a note on a home and the property value increased and you issued the note with above market interest rate it has two effects

1. The increase in the property value significantly reduces your risk.

2. There is a greater chance borrower may refinance to get some of that equity out at a lower interest rate.

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  • Jamie Bateman
    Investor · Baltimore County, MD · Member since 2014 · 466 posts · 439 votes
    4y

    @Charley Gates, welcome to the note world! I was in a similar boat (buy-and-holds only for a while). 

    This is a good question and one that I think doesn't get talked about enough. There is no question that inflation will eat away at your returns if you are strictly a performing-note investor, when comparing the same performing-note investment in a low-inflation environment. Thankfully for us, though, there are many ways to invest in notes so there is still opportunity. For example, many of us think that pricing for notes, especially for NPLs, should come down some in the near future as delinquencies rise and inventory increases. Also, if inflation is linked to higher real estate values, you might consider note investing to be safer in a high-inflation environment (better collateral).

    I would just say that there are many variables to consider, and inflation is one of them (albeit an important one). 

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    4y

    @Charley Gates

    Inflation has an impact on any yield type of offering, but what is also not mentioned is that in inflationary periods real estate values typically increase. If you hold a note on a home and the property value increased and you issued the note with above market interest rate it has two effects

    1. The increase in the property value significantly reduces your risk.

    2. There is a greater chance borrower may refinance to get some of that equity out at a lower interest rate.

    7e investments53 Reviews
    WebsiteView Page
    2Reply
  • Sergey A. Petrov
    Real Estate Consultant · Seattle, WA · Member since 2022 · 1k+ posts · 784 votes
    4y

    Say you buy a performing note at 80 cents on the dollar maturing in 5 years. With current inflation you 80 cents become a dollar in just over two years. You go upside down by year 5. If the note carries a 6% interest you are at about break even.

    I have done private lending for the last 7 or so years. Today, I am the borrower of as much as I can possibly borrow so I can leverage it and repay in tomorrow’s depreciated dollars. My crystal ball says we’ll have high inflation for the next 12-18-24 months unless there is some other major economic event to either shorten or lengthen that timeline.

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  • Charley Gates
    OP
    Investor · Meadville, PA · Member since 2021 · 75 posts · 45 votes
    4y

    Thank you for your thoughtful replies.  I appreciate it.

    Best regards.

    Charley

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