The financial world we live in is just as wild, if not more, than the mountains and woods we walk through. We are told that the fundamentals of our economy are strong, but we can feel that something is wrong. My unique financial background and survival passion make Financial Survivalist and excellent place to learn and share.

Saturday, November 5, 2011

Real Estate to Protect Against Inflation

What is going to happen to real estate as our economy unwinds? There will likely be inflation because the government has tripled our money supply. Read more about this by clicking inflation. How will inflation, unemployment,  and social unrest affect real estate?

Traditionally, to protect against inflation an individual would invest in a physical asset with intrinsic value. I feel that real estate is an excellent choice for this. Real estate provides shelter, and no matter what the economy is like, everyone needs shelter. As inflation begins to affect the buying power of our dollar, the value of real estate in terms of dollars will increase. Also, most real estate is purchased with borrowed money. In an inflationary situation the amount of money you owe will not increase. You can pay off the loan with inflated dollars.

So, should you invest in real estate? The biggest problem with using real estate to protect against inflation is indirect factors. In the event of inflation, the government will likely raise interest rates in an attempt to control inflation. This will make any type of new borrowing extremely expensive. The amount of real estate buyers will shrink. When there are more sellers than buyers, prices fall. So, even though the price of real estate will rise, it may not keep up with inflation.

How can I use real estate to protect me from inflation? The key is cash flow. If you purchase a rental property that cash flows sufficiently, you can raise rents with inflation and pay off the loan with inflated rental dollars. How quickly or slowly the price of the property inflates doesn't matter, because you win three ways; 1. Pay off loan with inflated dollars. 2. You can raise rents with inflation. 3. The intrinsic value of real estate will help protect you from inflation.

Remember, your home is NOT an investment. Even in the best market, the best "return" is not enough to offset the money you spend in the form of maintenance, taxes, interest, utilities, decorating, landscaping, and purchase. Your home is an expense and will NOT protect you from inflation. However, if you are planning on staying in your home for a long time than feel free to find a good deal and stay there. Interest rates are low and there are a lot of good deals out there. There are a few good government programs that don't need much down. Invest that money somewhere else.

The reason why I like real estate instead of gold is because no matter what happens, I win. If the economy recovers, my property values go up. If the economy crashes my property value is protected. Either way, my tenants pay the mortgage, insurance and taxes and give me some passive income. It's a win, win, win.

Investing in real estate is far from risk free. You can't just decide to go out and buy an investment property. I've seen plenty of people do that and loose everything. You MUST educate yourself, at least a little bit. You have to be able to recognize good deals and good properties. My favorite, all encompassing real estate book is The Wall Street Journal: Complete Real-Estate Investing Guidebook. It isn't everything you need to know, but it's a dang good start.

Do it right, be smart, and thrive.

2 comments:

  1. What about when the economy/employment gets so bad that your tenants cannot afford to pay their rent?

    ReplyDelete
    Replies
    1. Great question. It depends.

      1. Really Bad Economy: evict them. There will always be more renters, especially in a bad economy.
      2. Total Collapse: have good reserves in gold and silver, or other assets that can be traded for relatively worthless cash. That worthless cash will hopefully still be able to pay the mortgage. Then barter for rents.
      3. Anything Worse: It doesn't matter. I would collect rents as long as I could and do everything in my power to protect my family.

      Delete

DISCLAIMER!!!!!!!!!!!!!! Financial Survivalist MAKES NO CLAIMS WHATSOEVER REGARDING PAST OR FUTURE PERFORMANCE of investments. ALL EXAMPLES, DIAGRAMS, DISCUSSIONS, LESSONS, OR RECOMMENDATIONS ARE FOR EDUCATIONAL OR ENTERTAINMENT PURPOSES ONLY. THIS BLOG DOES NOT AND IS NOT INTENDED TO PROVIDE FINANCIAL ADVICE OF ANY KIND. ANY COMMENTARY USED ON THIS PAGE IS FOR PURPOSES OF DISCUSSION ONLY. PLEASE SEEK PROFESSIONAL ADVICE BEFORE YOU TO BUY OR SELL SECURITIES AND YOU SHOULD NOT CONSTRUE ANYTHING ON THIS PAGE AS LEGAL, TAX, INVESTMENT, FINANCIAL OR ANY OTHER TYPE OF ADVICE. PROFESSIONAL ADVISE should be sought before entering any dangerous environment. Do not attempt any act described or discussed on this website.