How do you prepare for the coming future?
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
Ok. We are in deflation now, and we don't know how long it is going to last.
Because of our government, we know that eventually interest rates, taxes, and inflation are going to go up, up, up. The most important prices for the average American—food, utilities and energy prices—are going to soar. This inflation will really devalue the dollar, reducing its already low purchasing power even further. We could even have hyper-inflation.
This inflation (and the big price increases) could begin in 6 months, 1 year, 2 years... there is no way to tell.
What does one do? What are the rules to follow when heading for a high inflationary period (possibly an inflationary depression)? How do you prepare? What is the ideal situation to be in so that you can make it through these upcoming tough times? How do you maintain a decent standard of living? How do you maintain your existing wealth?
Alfred, you mentioned that if inflation takes off you might be able to have a house paid off in 10 years. I just started investing but the projections for all 3 of my properties are that they will be paid off in 5-6 years at current rents. Actually I have added that to my purchase criteria, not just to meet the 50% rule but that I will get at least 50% of my purchase and rehab cash back out in 3 years or less in case deflation forces me to lower rents. I figure if I get half my money back in 3 years I will be fine lowering my rents some as I think it will take a couple of years for rents to come down with the number of people loosing their houses and entering the rental market-I also go the extra mile and try to make my properties extra nice for the price range. This 3 year, 50% return of cash is figured by subtracting out insurance, taxes, water, sewer and interest from the rent.
My choice is not to wait for the 'absolute' bottom in real estate. I know there will be other good/better deals out there in the future but with the returns that I'm getting right now, the cash that is being thrown off from my current investments will finance future purchases-that's why I decided to start right now instead of waiting for the 'absolute' bottom. T
I heard somewhere that they didn't confiscate gold coins held by citizens during the Great Depression.
Bob Hines:
Getting your properties paid off in 5 years via tenant rent is amazing. How can one possibly do that? These must be really cheap houses? How does your strategy work? Thanx, Alfred
My strategy is to buy cheap. I almost have 3 properties-going to be closing on 1 next week and another shortly thereafter. Paid $18k, $35k & $32k. Put $5k into the 18k, expect tops $5k in the $35k unless the HVAC shoots craps and at most $1.5k in the $32k one. Rented for $595, and should rent for about $950 and $800 in the current market. I purchased these with my HELOC, which is prime - 1.01% or 2.24% right now ****I DO NOT ADVISE USING VARIABLE RATE FINANCING, EXTREMELY RISKY**** But I view that we are in deflation and that rates are going to stay low for awhile, actually several years is my personal view (thus my 3 year time frame). I have pulled my entire $140k HELOC so the bank can't take it away and my monthly payment is about $265/month so my current rental can cover it's monthly expenses and the interest payment on the entire balance. I plan on purchasing 1 more rental and, depending on the purchase price and rehab expense, keep somewhere between $60k-$70k of cash on hand as reserves and enough in retirement accounts (all cash and bonds) to be able to pay the entire line off if interest rates should suddenly spike. I will also keep every penny from the rents in reserves until the time is right to purchase another one/pay down HELOC.
All properties meet the 50% rule and I am not forgetting the other expenses in my projections, I'm just adding a seperate criteria to make sure the property can withstand what I expect are decreasing rents. And again, as long as I can cover increasing interest rates (I feel that I can), if we get inflation, things get paid off sooner with higher rents.
Also, I am new to this so may be totally full of S@#$ and be heading toward bankruptcy doing this but I feel that I am being "aggressively-safe" or "safely-aggressive".
Bob Hines:
Ah, inexpensive houses is the answer. Not very real to us who live in California. Altho, due to REOs and foreclosures, we finally have prices down to the point where in some circumstances rents can cover PITI. Pretty smart strategy you've got going. You need to be aggressive, that is good. You just need to temper that with excellent due diligence and caution so that you do the right thing. Smart to use HELOC before bank takes it away, and you've got it backed up with cash in case interest rates spike, so that's good. Just don't use leverage and credit in excess or Bernanke will have to bail you out too (don't you wish).
That must be your daughter. Real cutie. Bring her along with you and your guaranteed to close any deal just on her charms alone.
Best,
Alfred
Bob Hines- Do you manage your own stuff? Others' stuff?
Try silver instead. Junk bags of silver are actually money. Coins were 90% silver until 1965. You can buy $1000 of coins and always use them as real money. About 55 pounds per $1000.