Residential Income Property and Inflation

Photo Credit: AMagillThe other element to consider when investing in Residential Income Properties is the inflation factor on the investments. The federal government is flooding the financial markets with liquidity and inventing new ways to lift and balance our frail financial system. Down the road, all of this activity is likely to result in sharply higher inflation. Not this year, and most likely not next year, but in two to four years, inflation could threaten everyone’s finances. What can you do to remain ahead of this inflationary curve and protect yourself?

Real estate investments often serve as great inflation hedges. Sitting on a pile of cash in inflationary periods provides dismal returns at best and the possibility of genuine losses when inflation finally and inevitably appears. Therefore, buying real property now with funds the investor won’t need for the next few years is the skillful way to protect one’s long-term net worth and to increase equity growth even further.

As always, any financial choice (even doing nothing!) involves a certain degree of risk. Purchasing real property is no different. But given the current financial turmoil, it is easy to see why an acquisition of Residential Income Property now, as part of a diversified investment approach, is something to be considered. Investing in real estate now has good odds of being seen as an extraordinary financial move years from now.

Inflation, as bad as it sounds, is a friend to any investor in Residential Income Property, not an enemy. Debt in an inflationary environment benefits the investor even more, by reducing the real-time value of liabilities (debt) and increasing the market value of assets to a market price. The general concept is that paying a debt today, with the depreciating value of currency, is less advantageous than to pay for it tomorrow with a currency that is even less valuable and thus far less expensive. Inflation allows the investor to pay off mortgage obligations (debt) in the future with less valuable currency, while at the same time the value of one’s property increases with inflation. Therefore, the more leverage one has, the better the return on an investment is likely to be.

To summarize:

  • Inflation is a friend to any Residential Income Property investor.
  • Inflation causes a rise in land value.
  • As inflation rise, rents rise.
  • As rents rise property values rise.
  • As property value rise equity in the property rise.
  • Inflation reduces real-time value of debt.
  • Inflation causes currency to de-value over time, meaning the investor is paying mortgage debt with less valuable currency.

Please note that we are not tax advisors nor are we licensed to practice tax law or prepare tax returns. Investors should consult with a financial advisor or a CPA.

Photo Credit: AMagill

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