Inflation is coming, and you may be wondering how it can change the course of your income property investment. With the proper use of debt, leverage, and an idea of how inflation affects rent, inflation can actually benefit you and your financial future.
Don't Pay Back Loans
When it's time to buy an income property, there will be a required page on the loan document which shows APR, interest rate, and the total amount of payments. For instance, if you borrowed $200,000 in 2001 to purchase an income property and the document states you'll have to pay back $600,000, you may have looked at it and automatically began thinking of ways to pay off the loan early, but Jason Hartman teaches to do otherwise.
Instead of trying to figure out how quickly the loan can be paid off, don't focus on paying the loan off early. The only reason to pay a loan off early is if you're dealing with consumer debt, meaning the interest is higher than the rate of inflation or coming inflation, or if the loan as an adjustable rate. Jason Hartman recommends limiting yourself to loans with a fixed rate, which means you get paid to borrow the money, whether you live in, sell, or rent the income property.
Inflation and Rental Property
With rent, the equation gets slightly mo
re complicated, but we also earn a higher return. With the example above, we could potentially receive about $81,000
over the course of a 30-year loan. This brings the return on investment (ROI) to about 10.74 percent. When including real after-tax rents, the return is closer to $30,000 if the rent is only raised with the inflation rate.
What Goes Up with Inflation
What do you believe rent does when inflation goes up? It rises a little faster. What also rises is the price of food, energy, clothing, and shelter. Food, in
particular, has shot way up in price. The bottom line is, everything has gotten a little more expensive.
What if Inflation Never Happens?
With all this new information regarding inflation and your investment, you may be wondering what the result will be if inflation never happens? Jason Hartman believes it's a good question, and he has a plan B in case inflation doesn't occur.
The plan B involves creating an investment which can sustain itself. This way, if inflation never happens, all it will cost you is what was spent to buy the property by collecting tax benefits and rent, so you can break even to create a secure financial future. (Top Image: Flickr | Philip Taylor PT)
The Young Wealth Team