Inflation and Real Estate — Video

What this episode covers

Inflation and real estate are misunderstood sometimes. ‘Course it depends on what side of real estate you’re on when inflation hits. Download Audio Transcript: People wonder what happens to real estate investments when inflation hits. The consensus isn’t on one or the other whether it’s going to be inflation or deflation. I don’t want to be the bearer of that news but there’s a school of thought, and I think this is the majority school of thought, that says inflation is waiting for us. They argue that the normally accepted formula for inflation has been altered so much that we don’t even know if we’re experiencing the amount of inflation they say we are. I’m one of those. I shop for groceries too and I’m telling you right now, food has been going up at a bigger rate than 2% a year. I don’t know about you but that’s what I see. It looks to me about 10%. Same thing with gas and diesel, right? Energy costs more than 2% a year more. I don’t know what it is; i don’t know what it’s going to be. I just know because I worship at the altar of fundamental principles. I don’t predict things; I don’t come across as I understand this is what’s going to happen or that. What I look at is if you print a whole bunch of money, the government, and you keep printing it and keep printing it and keep printing it, and you don’t see inflation yet, at some point it’s not that somebody magically has obviated the consequence of unending money printing. It’s that it hasn’t the street yet. Now there’s all kinds of reasons why all that money hasn’t hit the street yet and that’s a different conversation; that really isn’t apropos to my blog. What is apropos though is that if and when that inflation does hit, your real estate will be affected in this manner: Rents tend to track inflation; that’s a good thing. Not for your tenants, but for you. In the 1980s when we had runaway inflation, we had double digit inflation for many, many years in a row. We had interest rates for prime rate 18 to 20%. FHA was over 16. Conventional rates 16, 17, 18%. People were getting certificates of deposit for 13, 14% at the bank. I tell that to young people and they get excited. I have to remind them, wait a minute. Yeah, grandma got 14% at the bank for a CD and she got it for sometimes two or three years. The problem was that was interest. She paid ordinary income taxes on that interest and then the interest rate, the inflation rate at the time, was just under, equal, or maybe even more than that interest rate. She might have put a 100,000 in and made 14,000 a year but after inflation and after taxes she probably didn’t have her original hundred in terms of actual buying power. Everything’s relative. Going back to your real estate, though, if your rent was 1,000 dollars a month, if inflation hit, in the next six months that rent’s going to be able to be a lot more than a 1,000 dollars, maybe 1,030, maybe 1,100. I don’t know; it’s your market. It’s how high was the inflation, etc., etc. What was the supply and demand in your market? That’s going to have a large impact, too. What really happens is that inflation causes rents to rise. Now what happens with the value? Real estate values also, with some rare exceptions, they track inflation, too. If you buy real estate and you’re wondering what’s going to happen to your net worth, generally speaking the income produced by that real estate and the real estate value itself are going to go up as inflation shows its ugly head. Now is it going to track it exactly? No – or yes. Where are you? What kind of inflation is it? How did the government choose to combat it? It’s different each time.

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