Who's Willing to Overpay in Anticipation of Inflation?

5 Replies

"Should inflation get out of control, Fed officials believe they have the tools to control it." - Do they?

https://www.cnbc.com/2021/03/1...

Those of us who are constantly analyzing multifamily deals and putting offers know that there is a high demand as deals keep going above the asking price. Maybe all those investors "overpaying" for real estate deals are the wise ones in the end!

I've been offering closer to 78% arv on some deals, especially rentals. That's overpaying but as long as there's cash flow I'm still buying it. 

I am also seeing people pay prices for properties well over asking.  The prices they pay ONLY make sense if rent increases accelerate and/or cap rates continue compressing.  It is frustrating to compete against such irrational behavior.

They may be right and they may make a lot of money.  On the other hand, they are making somewhat speculative bets.  If the market continues at today's pace, they'll have lousy returns. So, even if they are right, I would not call them wise.  Buying a winning lottery ticket does not make one smart.

I believe that inflationary pressure will be very strong over the next decade. 35% of all US dollars have been created in the last 13 months. Wood prices have tripled during that time and steel prices have doubled. Labor costs are rising. I would rather have my wealth stored in in hard real estate assets. Im typically pretty well diversified with real estate and stocks, but I think Ill be pushing my portfolio towards more real estate due to expected inflation. 

@Jake Saliba In a high inflationary environment, yes, the Fed will likely rush to raise rates to control it.  At the moment, they say there isn't inflation and that the expected inflation isn't going to be much or last long.  

But inflation is coming; I have no doubt.  The increment in the money supply has been something never seen before    https://fred.stlouisfed.org/se...

So, the dollar will devalue, and assets will hold value, like Real Estate.