Projected major inflation vs changing criteria

21 Replies

With all the money being printed out by the government, what is everyone's plan as far as changing their criteria now to prepare for the next couple years with the projected major inflation? 

The hyperinflation folks have been predicting hyperinflation just around the corner for over a decade. At least since Bernanke fired up the helicopters to rain money from the sky. I'm not saying it's impossible, but I'm also not buying negative cash flowing properties banking on inflation to come save me!

@Taylor L. I definately get the not buying negative cash flow part, that would be juat plain dumb haha. My thing is that Biden and Harris have blown past the federal budget already and are basically printing their way out of debt. Plus with all of the the "stimulus" checks, how long until the economy is going crash? I didn't know if anyone is taking in less of a cap rate now in order to see it rise later with inflation and how much less of a cap rate they'd be willing to take.

Originally posted by @Nathan Barshinger :

@Taylor L. I definately get the not buying negative cash flow part, that would be juat plain dumb haha. My thing is that Biden and Harris have blown past the federal budget already and are basically printing their way out of debt. Plus with all of the the "stimulus" checks, how long until the economy is going crash? I didn't know if anyone is taking in less of a cap rate now in order to see it rise later with inflation and how much less of a cap rate they'd be willing to take.

 Cap rates have been falling for years and years. Personally I don't invest on cap rate, I invest for return. Return is driven by the business plan and value add potential. We've been running the printer to finance the Federal Government for years and years now, this isn't new. When we do eventually lose supremacy of the dollar we're in for some tough times. Inflation is going to happen, and it's going to benefit owners of real estate!

@Nathan Barshinger

The last administration was printing money to spend its way out of the pandemic as well. Nothing has changed.

The economy is going to crash at some point anyway regardless of who is at the helm.

Sit back, enjoy the show, and never waste a good crisis!

@Dave E. I agree the market will crash no matter whoever is in the White House and that we've always been printing money, I'm just worried because of them printing a lot more than usual this year.

I'm not in the predictions game but I've been hearing about a housing market crash soon. What are your thoughts on that? I understand people are always going to say there's going to be a market crash soon and once one comes along, they'll say that they predicted it when they were just guessing the entire time. However there's been record highs all over the U.S. I was studying Birmingham, AL and home values grew 14-15% in the past year! Seems to me like that bubble might have to burst soon.

@Nathan Barshinger

I generally agree that the bubble is growing. When it will burst is anyone’s guess. My gut is about 18 months, but that is just a wild guess.

Honestly I am more concerned with commercial real estate in larger cities. Restaurants, bars, and office space have all been struggling over the last year. I feel like there is more stress on the commercial side, but I could be wrong.

The Fed (Jerome Powell) has stated consistently their targeting inflation rates of 2%. This is higher than we're used to, but not necessarily going to crash the economy. U.S. dollar is the global currency for a reason, when a country owes another country, they pay in U.S. Dollars, not yen, not euros. If the U.S. dollar collapses, the whole world will be in trouble.

If you believe in hyperinflation coming soon, the smartest thing to do is put your $ into assets. Theoretically, your dollars aren't worth as much, so assets prices will go way up. Get real estate, get stocks. If you're holding onto cash in a inflationary environment, your cash is losing value ever year (it' worth less)

@Derrick Dill the fed recently said they will let it run up to 3% to make up for lower than target inflation over the last year. 

@Nathan Barshinger inflation is necessary when the government increases debt spending. There is no way the government could pay back this debt without the help of inflation devaluing future currency. That is your answer of how to respond. Taking on debt is the best way to hedge against inflation. 

Another reason I like rental properties is because they are inflation adjusted investments. Both rents and property value increase with inflation. 

Inflation hurts savers the most. If you put cash in a savings account and you are getting 1% in a 2% inflationary environment, you are losing money every year. Even in the stock market, people love to chart out 20 or 30 year average returns, but they fail to include inflation in the numbers. Someone in their 20's might think $1,000,000 is a good retirement goal, but 30 years from now the buying power of $1,000,000 will be equal to $500,000 today. That is why "being a millionaire" isn't really wealthy anymore.

Compare that to rental property loans. I have loans I took out this year that are 3% fixed for 30 years. I can claim that interest as a business expense against my taxes, which means roughly 25% of that interest comes back through deduction. That effectively reduces my interest rate by 25%, so I am actually paying 2.25% interest out of pocket. With the power of inflation, future dollars I pay back are worth less. If inflation is at or above 2.25%, I come out ahead. It is basically getting a near 0% loan to buy properties. By year 30 of my loan, I am paying back dollars worth half as much as the day I took out the loan.

There is probably low risk of hyper inflation, because if inflation raises too much, the fed will take steps to increase interest rates to slow down the economy. That being said we can expect interest rates to stay low for the near future. The fed has stated they will buy unlimited mortgage backed securities in an effort to keep mortgage rates low. When asked recently when that will change, the response was that they have not even though about thinking about changing the strategy. 

Plan for low interest rates and higher than normal inflation over the next year. 

@Nathan Barshinger The money printed in 2020 and 2021 will likely cause significant inflation down the road. The  Biden administration will likely continue printing. Therefore, I expect real estate price increase about 100% in the next 3-5 year across the country, mainly due to devaluation of US currency.

My current strategy is aggressive buying.

I think there already has been hyperinflation in asset prices.  My guess would be if you see a deal that pencils you should buy it if you can.  That’s what I’m doing I think in 10 years I’ll be very happy I did.

Few unrelated comment:
- The most direct answer for your original question is answered by Powell in last Thursday meeting. As long as unemployment doesn't go back to pre-covid times they keep printing money with an inflation target of 2%
- In practice it has nothing to do with hyperinflation, you can't create hyperinflation in G4 economics,that thing only possible in fourth world country
- since all the world uses dollar for reserve currency and other G4 member also printing money, there're devaluation but not much since everybody does the same anyway including China.
- Your birmingham property increase 14% not because of the inflation per se but because all these year the price overthere is declining/flat for decades haha :)
- money for sure can buy less, all hard asset price will increase for decades.
- the one that's being sucked up in this phenomenan is a milleneal that has lot of student debts without any investment to hedge.

having more comments:
- if US gov is fourth world country and by doing unlimited printing, for sure hyperinflation already occurred and that currency is cut by half
- but since 4-5 G4 banks is also expanding their balance sheet, so everybody increasing their circulated money supply regardless 
- since most country especially Asia is relying upon to export to US and Europe consumer, these money printing doesn't matter 
- the real threat is if Dollar is replaced with another currency such as digital yuan, now that would become a big problem, but wouldn't happen soon because other country doesn't want to rely upon China.

Projected inflation?  It's already here.  Everything from lumber to labor is up and supply chains are severely backlogged.

Buy affordable housing in decent locations financed with low cost debt and sleep well at night.  Focus on brokers, agents, owners, and offers.  Everything else is just noise.

@Carlos Ptriawan I appreciate your comment, however if hyperinflation can only exist in 4th world countries, then why are we experiencing it here in the U.S.? Also you said that the money printing doesn't matter since Asia relies on the U.S. and Europe for goods; that doesnt make sense because if they buy the same amount of goods with more U.S. currency circulating we either 1) need to produce much more products per year to soak up that extra currency or 2) the price of the products we do produce in a year currently will go up drastically (which the price of lumber and labor was already pointed out in this thread to be way up in price). Also, yes I understand the Birmingham market going up 14% in the last year isn't 100% due to inflation but it also has a lot more homeowners and investors flocking to that area.

I think that major inflation is already here in the United States. Although for most real estate investors/owners. Inflation can sometimes be viewed as a positive outcome. Inflation is actually one of the most important factors in real estate appreciation. In fact, there is a direct correlation between inflation, demand, and appreciation. Most investment properties have a built-in protection against inflation because the return on investment is tied to rents, and rents are designed to increase periodically. 

If you're not able to find off market/value add deals, you kind of need to accept lower cap rates in this market (in residential).  That doesn't meant that you have to accept deals that don't cashflow.  Get the upside of inflation through rental and price appreciation without putting yourself in a liquidity crunch if the unexpected happens.

I agree that inflation is likely to run hotter than it has over the last 10 years, and residential housing will likely run above overall CPI for at least the next 5 with the strong demographic support from Millennials moving from apartments to single family homes, but I would not expect 5%+ inflation for very long.  If the overall level of CPI exceeds 3% for more than a year, the Fed will have to give up it's current stance that inflation is transitory.  This would cause to them to raise rates/stop asset purchases in order to reduce aggregate demand in the economy.  The likely result is a drop in stocks and other financial risk assets.  

Also, I expect the Biden administration to drop the tariffs on lumber from Canada to release the pressure on lumber prices.  This would help builders ramp up new home construction.  Coupled with a lifting of the foreclosure moratorium and higher mortgage rates (coming), supply/demand should be more balanced over time.

All of that said, I LOVE buying cash flowing rentals w/ leverage right now.  I think the next 5 years are going to be great!  And much better than owning AGG etf in your investment portfolio. 

Hi @nathan 

@Nathan Barshinger  , America is not yet experienced hyper inflation, it's only small relative inflation.

If you see average inflation in US it's only 1% but in China and other Asian country, 3%-4% is the norm year-to-year basis.
What I'm saying is you've seen nothing. In Asia people had experienced cost of good increased 10x. In US we don't feel it because heavy gov. subsidy and many things are very cheap (computer/electronics and imported stuffs from Asia).

You talk to your friend that's expatriate in Asia / Latin America and they will tell you the definition of hyperinflation :)