Inflation’s a bad thing, right? Everybody knows that. All you have to do is listen to people yapping about it from Federal Reserve Chairman Ben Bernanke all the way down to the man on the street. But they either don’t know or aren’t telling the whole story. Savvy real estate investors are shrugging off the debilitating effects of inflation on our currency every day and turning a profit in the process.
To understand how inflation can make you rich in anywhere from 7 to 12 years (remember we’re not into get rich QUICK around here) requires that we flip around our way of thinking. For most of modern financial history, and especially since the advent of credit cards, the mantra has been debt is bad for you. Granted, the wrong kind of debt – consumer debt – could be classified as clinically stupid but properly constructed real estate debt thrives in the face of inflation.
We’re going to work through an example of how it works, courtesy of the Jason Hartman income property investing philosophy of taking on debt in the form of a fixed-rate, long-term mortgage tied to a piece of income producing property. In short, you need to be a landlord. The first thing to get in your head is that the goal is NOT to pay off the mortgage as fast as humanly possible; that only makes sense in the old, non-inflationary world.
In modern America, inflation is a constant that won’t be going away any time soon. Since inflation reduces purchasing power by devaluing the money in our pocket, we can assume that all assets valued in terms of dollars get less valuable every year. What is the opposite of money? Debt! When you enter into a mortgage with your friendly local banker, he gives you a chunk of money to buy a property with and writes down a number on his ledger that you must pay back in full at some point down the road. Let’s say this number is $100,000.
Thanks to inflation, which creeps forward at a rate of about 10 percent annually – despite the much lower and erroneous rate claimed by government economists – the value of that note, in terms of purchasing power, will diminish by the rate of inflation each year. This is bad for the banker but great news for you. One year from the day you take out that mortgage inflation will have reduced the value of everyone’s purchasing power by about 10 percent. That means the real value of that note is only $90,000. Ten grand just got lopped off what you owe thanks to inflation.
Think about it. This idea is more powerful than you can imagine and holds the key to your future financial independence. We’ll talk again soon. (Top image: Flickr | Rego – d4u.hu)
The Young Wealth Team