Categorized | Featured, The Economy

Where Is Inflation?

 

apartment1-300x225Like it or not, it is coming! 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 do we do to remain ahead of this inflationary curve and protect ourselves?

One thing we can do is to consider buying cash-flowing Residential Income Property, because real estate investments often serve as great inflation hedges. 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.

Inflation causes a rise in land value. As inflation and land value rise, rents rise. As rent rise, cash-flow in the property rise and thus, property value rise. As property value rise, investor’s equity in the property rise while reducing real-time value of debt. The investor now is paying his mortgage debt with less valuable currency while collecting higher rents.

Buying Residential Income 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.


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