Duck and Cover! Inflation Is Coming!November 19, 2021 by Paul Begich
Catchy title, right?
Do I think you should be worried about inflation? Oh, hell yes. But as a real estate investor and agent, I see this as an AMAZING time to get into real estate investing, BECAUSE of inflation.
Let’s take a step back and do a quick review of inflation. I’m no Adam Smith, but I feel I’ve got a decent understanding of the fundamentals of economics. So, what is inflation? Inflation is the general decrease in the value of the dollar compared to its ability to purchase goods and services. Meaning, if a gallon of gas costs $3 today, then tomorrow, that same $3 might only get you three quarters of a gallon of gas. Good example? Ok, here’s another. Say you like to go to Valleyfair (I mean, who doesn’t?), and in 2021 a ticket costs $50. Well, with hefty inflation, a ticket might cost $75 in 2022! Crazy, right? The value of one dollar is worth LESS tomorrow than it is TODAY—that’s inflation.
Here’s why I think that right now, real estate NEEDS to be a part of EVERYONE’S investment portfolio.
Over the last 18 months, the United States has printed BOATLOADS of money, and this is having an immense impact on the value of the dollar. Currently, inflation is extremely high! And if I were a betting man, I’d say that inflation is going to continue to rise for the foreseeable future.
OK, so why invest in real estate?
In inflationary times, hard assets tend to hold their value much more than other forms of investing like the stock market, mutual funds, CDs, bonds, etc. Additionally, hard assets can also ride the inflationary wave. And because you’re typically using leverage when buying real estate, you can ride this inflationary wave to your favor.
Let’s use a real-life example.
John has $50,000 stashed away in an IRA account. He’s concerned that the mutual funds his IRA account is currently invested in aren’t going to perform past the inflationary rate of today’s market. His mutual funds may be producing a 3% year-over-year return, but the inflationary rate is over 5%. That means his IRA account is actually LOSING money. So, what does John do?
John elects to self-direct his IRA funds into real estate. John invests those self-directed funds to a local real estate investor (so John has no “material interest” in the property) and that investor uses the $50,000 to purchase a $200,000 single-family home. The home is going to be a rental property. Maybe the investor fixes it up, maybe they don’t, that’s not the point for our inflation example. The point is that because the investor used a mortgage to purchase the property, now they get to lean into using leverage in inflationary times to grow their investment. Because we know that in inflationary times products and services cost MORE tomorrow than TODAY, that home is going to INCREASE in value. Inflation makes shit cost more, and that shit includes real estate.
Now John’s single-family home is worth $225,000 after only owning the property for one year. That same $50,000 investment has grown to $75,000 (the value of the home minus the outstanding mortgage of $150,000). Had that money been invested in an avenue that wasn’t using inflation to its favor over the course of the year, now John would need MORE money than his initial $50,000 to purchase the same home. Essentially, the investment into real estate hedged against the negatives associated with inflationary markets and boomeranged the initial capital in John’s IRA account.
I’m hoping all this makes sense! If not, I’m always down to chat about real estate investing and what the next market cycle will look like here in the Twin Cities.
In short, to hedge against inflation, buy real assets like real estate and watch your capital skyrocket!