Inflation Is The Real Estate Investor’s Best Friend.


Actually, if you are investing in stocks and bonds, mutual funds, or just about anything else (except, perhaps, commodities), inflation can be a real killer. The title of this article was adapted from a recent article in Forbes entitled “U.S. Dollar Has A Long Way To Fall“, which posed the question: “[w]hy does the Fed want inflation? It is very simple: If you carry a lot of debt, inflation is your friend.” If the Fed wants inflation (the not-implausible premise of that article), you can be assured that the Fed will make inflation, sooner or later. Next question: who carries a lot of debt? You guessed it, real estate investors. Through the magic of high leverage ratios and cheap fixed rate financing (particularly on one to four unit residential income property), real estate investors have the ability to take potentially ruinous inflation and turn it to their advantage. Of course, if you borrow a lot of money (as the U.S. treasury has from many foreign governments), inflation means the dollars you have to pay back will be worth very little. Imagine what the rents on your income properties will be like in twenty or thirty years into the future — even the worst performing investment in current dollars will be looking pretty sweet by then, provided you’ve obtained fixed rate financing. Thus the old expression: “don’t wait to buy real estate, buy real estate and wait.”

When is the best time to buy insurance? Why, before you need it, of course. Currently, there is very little inflation in the U.S., and some sectors have seen deflationary pressures, such as, for instance rents in most markets. Does this mean that you don’t need to think about inflation? In a word, no. This is the time to take the steps you absolutely must take if you want to have any purchasing power in the post-financial crisis future.

As the price of gold bears witness, many people around the world are losing faith in the once-almightly U.S. dollar. If those people had actually seen the charts showing the expansion in the money supply that began during the depths of the financial crisis, they might have even less faith. For, the U.S. has set upon a course of monetary expansionism that is, I believe, unprecedented in its scale in historical times. Even billionaire investor Warren Buffet believes inflation is on its way: Bloomberg reports that Buffet said: “[a]country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, it’s going to inflate its way out of the burden of that debt.”

Here’s where the smaller residential income property makes sense. Only on these properties can you lock in fixed rate thirty year financing. While you can get a fixed rate on commercial properties (five units and up), you will only have a rate lock for a much more limited time. By the time your rate lock expires and it is time to refinance, the rates will likely have increased dramatically. Not so with the conventional thirty year fixed rate loan. The people who lock in as much as this high-quality debt as possible to purchase income producing properties will look like geniuses a few years down the road, once the effect of the monetary expansion has finally been felt in earnest. Indeed, this may even be something of a self-fulfilling prophecy in that the more people flee the dollar, the more they will invest in commodities such as oil, which will in turn, stoke higher inflation. Get it?

I do feel sorry for people who have entrusted their life savings to the tender mercies of the financial services industry and the pathetic 401K. The meager percentage of after-inflation return you can expect to get on such accounts (after expenses) in the future will never be enough to provide for most people’s retirement needs. Why not opt out and place your trust in what you already know is a good investment: an income property in a good location with a long term fixed rate loan. That’s something you, not Wall Street, can control, manage, and profit from for years to come.

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  1. Pingback: Real Estate Investing Links for November 25, 2009

  2. Well I agree with the concept that those buying real estate now should be able to take advantage of the inflationary environment. But as far as commercial loans go you can get 20 year loans with rate caps. Also, with residential loans, I have found that you are generally restricted to how many you can buy.

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