policy. Here are a few of the reasons why.
How Mortgages Devalue
There's an inflation calculator on Google, which will show the value of inflation at 4% after ten years. In real terms, a $100,000 mortgage will have shrunk in value to about $66,000. For an example, assume you buy two fourplexes for about $500,000 each, roughly equating to $1 million in loans and mortgages. These mortgages are for interest only.
With an interest only loan, ten years in approximately 120 payments have been made. No principal has been paid at all. At the end of the ten years the mortgage statement still reads $500,000. Though this may not seem like a good deal, it is. Keep inflation in mind. $1 million in the future will be worth a lot less, closer to $600,000.
Why Landlords Love Inflation
With 20% annual inflation, mortgages would decline greatly over that same ten years. Inflation literally destroys the power of debt. It's bad for the bank but is the precise reason landlords want high debt and love inflation. Not only does the debt go down, in real terms, but rents tend to rise over time, along with the value of packaged commodities. Why? Because the economic climate is often difficult (especially today) one in which to construct more properties. Few builders are willing to risk much as materials prices keep rising. This makes now a perfect time to buy an income property and lock in today's price.
Double Inflation Arbitrage
The real strategy is what Jason Hartman calls “Double Inflation Arbitrage.” The first step is going to the bank and borrowing money to make the investment. In this scenario, you probably were required to put about 20% of your own money into the deal as a down payment, but there's still plenty of debt left over to profit from.
Besides inflation, how do you make money
from your mortgage debt? Outsource it. Rent the property out to a tenant, and have the tenant essentially pay the debt by putting his or her rent towards the mortgage payment. Furthermore, the tenant is paying off the debt with depreciated dollars, while the property itself is appreciating. This is a double benefit for the employer, or a Double Inflation Arbitrage.
Debt has the potential to be constructive or destructive. Consumer debt has a tendency to be destructive, so to take full advantage of a property loan, choose a fixed rate, and follow Jason Hartman's income property investment strategies. (Top Image: Flickr | BlatantWorld.com)
The Young Wealth Team