Ok, this is a big one. You keep saying that real estate is a hedge of protection against inflation but home prices are coming down. How does real estate protect me from inflation if prices come down? I’m glad you asked, I’m going to tell you why.
Real estate on a fixed rate mortgage stays the same month over month. As commodities and the price of living rise your monthly payment stays the same. If you’re paying $1400/mo today that means you’ll be paying $1400/mo in 29 years if you haven’t paid off already. We all know that in 29 years the cost of everything will likely have tripled. Also your home that is worth $200,000 today will possibly be worth $400,000-$500,000 by then. Imagine walking into retirement with this amount of equity in your portfolio.
If you own Investment properties even better. The amount you charge for rent rises annually or with inflation but your payment stays the same. This means that if your property cash flows $100 today it might cash flow $200 next year. Imagine in 30 years how much income it will generate. Your tenant pays the mortgage off for you and from then on you collect straight cash. Imagine collecting $2,500 a month from one property. Now imagine you own ten by the the time you retire. That’s $25,000 a month or roughly $300,000 a year from those properties. If inflation occurs than your rent prices go up! now you’re renting those properties for $3,000 a month… and collecting $360,000 annually. Making sense now?
It’s a no brainer. Any way you slice it owning real estate is the most sure way to protect your money from inflation.
The future belongs to you!
The future belongs to you!
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Does Real Estate Protect From Inflation?
Inflation is a term that often elicits worry and concern among individuals and investors. It refers to the continuous rise in the general price levels of goods and services over time, leading to a decrease in purchasing power. While inflation is a natural part of any economy, it can have negative consequences for individual savings and investments. However, one investment avenue often touted as a hedge against inflation is real estate.
Real estate has been considered a tried and tested investment option for decades. Many people perceive it as offering stability and protection against the erosive effects of inflation. Let’s explore why this notion holds, and how real estate can serve as a safeguard in an inflationary environment.
Firstly, real estate investments tend to generate cash flow through rental income. The beauty of rental payments is that they can be adjusted regularly, usually in line with inflation or market demand. As the general price levels rise due to inflation, rental income can also increase accordingly, thereby offering an additional source of income to combat the impact of inflation. Moreover, landlords can choose to increase the rental rates on their properties to keep pace with inflation, ensuring that the real estate investment remains valuable during inflationary periods.
Secondly, real estate is often viewed as a tangible asset, which provides a sense of security for investors. Inflation can erode the value of currency over time, but real estate is seen as an asset that retains value, if not appreciates, in the long run. Unlike paper money or some financial investments, real estate has an inherent and enduring value that is less susceptible to short-term fluctuations brought on by inflation. This confidence in the asset’s worth serves as a robust inflation hedge.
Additionally, real estate investments afford individuals the opportunity to leverage their investments. Banks generally provide mortgages with fixed interest rates, which can be an advantage during an inflationary period. As inflation drives up prices, property values also tend to rise. Consequently, investors can benefit from the appreciation of the property while maintaining the same mortgage payment. This leverage amplifies the investor’s return on investment, further protecting against the effects of inflation.
However, it is important to note that real estate, like any investment, is not foolproof against inflation risks. Economic factors such as the availability of credit, interest rates, and the general real estate market conditions can impact the protection real estate offers against inflation. For instance, during periods of rising interest rates, mortgage payments may increase, potentially offsetting the benefits of rental income. Similarly, if the real estate market experiences a downturn, property values may not appreciate as expected.
Furthermore, the location and type of real estate investment also play crucial roles in determining how effectively it will guard against inflation. Investing in prime locations with growing economies and high demand can ensure that the property value appreciates at a rate higher than inflation. On the other hand, investing in less desirable areas or properties with limited demand might not offer the same level of protection.
In conclusion, real estate has been historically praised as a hedge against inflation due to its cash flow potential, tangibility, and leverage possibilities. Rental income that adjusts with inflation, the intrinsic value of real estate, and the ability to benefit from property appreciation can help individuals navigate the erosive effects of inflation. However, it is essential to consider various economic factors and the specific characteristics of the real estate investment to determine its effectiveness in protecting against inflation.
Can Real Estate provide protection against inflation? appeared first on Inflation Protection.
