I'll give you the way to become wealthier if we have inflation (you're welcome) -bran

[bran987]

Or at least my way.

Since I like you guys.

There are certain asset classes that perform well in inflationary environments. You know all the familiar ones I don't have to list them. I'm not so sure we can bank on commodities like metals tracking inflation like we have before, but I'm not an expert in that. There is one thing I am an expert in though. Rents track inflation. Of course, so do home prices, and there a lot of very smart people right now loading up on homes. But I'm going to talk about income producing real estate, (specifically apartments because the gov't will provide 35 years loans on those since it is housing, whereas for retail/office/industrial you have to go to a bank which will only give you a 5-7 year loan).

So why is it better to own income producing real estate than say... a precious metal? The answer is prudent use of fixed rate long term debt.

THIS ONLY APPLIES IF YOU BELIEVE THERE WILL BE INFLATION, MAKING THE USE OF FIXED LONG TERM DEBT PRUDENT. I REALIZE LEVERAGE HAS RISK, BUT FIXED RATE DEBT IS ADVANTAGEOUS AND EXTREMELY VALUABLE DURING INFLATIONARY TIMES.

Regardless of supply and demand and whether or not you think certain inflation based investments will appreciate faster than others, let's assume for now that they all appreciate at a similar rate.

OK:

Let's say you own $1 million of a precious metal, and we have 100% inflation. And your metal is now worth $2 million. You have kept up with inflation.

Now say I take my $1 million and put that as a down payment on a $3 million apartment building. I take out a $2 million loan at the prevailing rate today (use 6%) for 30 years from Fannie Mae. (substitute $100k for a $300k 4-unit rental building etc. if you want to use smaller numbers).

$3MM Apt. Building:
$300k Gross Income
- $150k Annual Debt Pmt
= $150k Net Income

As you can see, current low interest rates combined with a distressed market allows you achieve almost a 2x debt coverage ratio in these times (300k income and only $150k debt payment, very safe) whereas in times before you would be lucky to achieve a 1.2x debt coverage.

Now let's take the same example we have 100% inflation. My rents and therefore gross income has doubled to $600k, but my fixed rate debt payment is still just $150k. I now have an extremely safe investment, and the value of my building is now $6 million.

Unless you are playing some futures contracts or some such on metals (which can wipe out your whole investment pretty fast), we made 3x as much using prudent long term fixed rate debt. The real estate investor has $3 million profit, the guy who bought straight up metal or, similarly, real estate with all cash has $1 million.

There are load of other reasons to buy apartments, for instance almost none have been started in the past 3 years and supply is constricted (although a new construction cycle is beginning now). It will continue to be harding to get a mortgage now than ever before and homeownership in America will continue to decline (what will they do? Uhh, rent apartments or houses). Uhh what else hispanic population is booming like you will not believe and they prefer apartments, the echo boomer population (biggest since baby boomer) is just turning renting age. I could go on. And the whole luster of owning a home is just gone now.

WHAT IS THE TAKE AWAY? APARTMENT BUILDINGS ARE THE ONLY INVESTMENT CLASS IN THE WORLD THAT WILL ALLOW YOU TO PUT LONG-TERM FIXED LOW INTEREST RATE DEBT ON IT THAT IS ALSO AN INFLATION BENEFICIARY, THE REASON BEING THE GOV'T SUBSIDIZES HOUSING AND THEY CONSIDER APARTMENTS PROVIDING HOUSING FOR THE POOR. IT IS THE ONLY GIFT THE GOVERNMENT GIVES TO THE PEOPLE WHO MAKE INVESTMENTS IN THE U.S.

THE RISKS:

Operation Risk: You don't know how to buy or operate apartment buildings. The only answer is to learn how or partner with someone who does. Or just buy a house and live in it, but you will never be able to buy as much house as you can commercial property, because personal residences are based on your credit score/income while commercial property lending is based almost exclusively on the strength of the deal you are purchasing.

Deflation: Of course deflation is bad.

Supply/Demand: Real estate goes in cycles like everything else. Developers are onto the fact that apartments are in real short supply now and are building again. But if we have inflation, this would mitigate much if not all of that risk due to your long term fixed debt at such a low rate.

 

[bran987]

Re: I'll give you the way to become wealthier if we have inflation (you're welcome) -

Fannie Mae also has a small loan program for loans under $1 million so you can do this with any size building investment (even less than 10 units)

Shit, please move to Success Forum someone.

 

[75th]

Re: I'll give you the way to become wealthier if we have inflation (you're welcome) -

A buddy of mine has it made. He buys foreclosures for $10-90k in the south side of Chicago, spends $20-50k to rehab to section 8 standards, then puts them on the market. Section 8 usually pays 90-95% of his rents. Has about 30 or so properties by now...been doing it about 6 years.

 

[bran987]

Re: I'll give you the way to become wealthier if we have inflation (you're welcome) -

A buddy of mine has it made. He buys foreclosures for $10-90k in the south side of Chicago, spends $20-50k to rehab to section 8 standards, then puts them on the market. Section 8 usually pays 90-95% of his rents. Has about 30 or so properties by now...been doing it about 6 years.

That's great, and that works. I know a guy who did the exact same thing here, he has 50 houses but he's been doing it about 15 years. Bought cheap, put a little money in and Section 8.

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A couple other things to consider about this:

1) With real estate you get paid a nice dividend while you are waiting for inflation (the income each year), while other inflation based investments you rarely do.

2) If you own an investments that keeps pace with inflation, you really aren't becoming any wealthier. With the scenario above you are actually becoming wealthier as the leverage allows you to control larger assets and outpace inflation.

I know the stock market is also an inflation hedge, but does anyone know if it is just a 1:1 keep up hedge? I think it is, but not sure.

 

[-SD-]

Re: I'll give you the way to become wealthier if we have inflation (you're welcome) -

Fuck that shit Im buying some aluminum.

 

[75th]

Re: I'll give you the way to become wealthier if we have inflation (you're welcome) -

Fuck that shit Im buying some aluminum.

Unobtanium is where its at bor.

 

[75th]

Re: I'll give you the way to become wealthier if we have inflation (you're welcome) -

That's great, and that works. I know a guy who did the exact same thing here, he has 50 houses but he's been doing it about 15 years. Bought cheap, put a little money in and Section 8.

----------

A couple other things to consider about this:

1) With real estate you get paid a nice dividend while you are waiting for inflation (the income each year), while other inflation based investments you rarely do.

2) If you own an investments that keeps pace with inflation, you really aren't becoming any wealthier. With the scenario above you are actually becoming wealthier as the leverage allows you to control larger assets and outpace inflation.

I know the stock market is also an inflation hedge, but does anyone know if it is just a 1:1 keep up hedge? I think it is, but not sure.

Indeed. I'm bringing him to St Louis on Tuesday to take a look at putting some cash into one of our clients. He makes an easy 12-14% consistently off of his properties so he's looking for a higher risk/higher return scenario.

 

[gotmilk]

Re: I'll give you the way to become wealthier if we have inflation (you're welcome) -

Section 8 is the way to go.

I'm also buying up condemned buildings within a 5 minute walk of a local college. I can rent these suckers for $1500 montly or 2x what other apartments in the area go for.

Oh...and doing solar farms before the gubment ends the 30% federal cash grant

 

[-SD-]

Re: I'll give you the way to become wealthier if we have inflation (you're welcome) -

I rack disciprine

 

[bran987]

Re: I'll give you the way to become wealthier if we have inflation (you're welcome) -

Section 8 is the way to go.

I'm also buying up condemned buildings within a 5 minute walk of a local college. I can rent these suckers for $1500 montly or 2x what other apartments in the area go for.

Oh...and doing solar farms before the gubment ends the 30% federal cash grant

It's OK.. I can tell you from lots of experience I'd rather own a nicer building in a nicer part of town where people pay their rent and leave the unit in the same condition as when they moved in any day, you'll get more appreciation in those areas too. Section 8 is not ideal but it does have it's upside, you can make a high return on equity slumming it. Just make sure to budget in your numbers a couple thousand more per Section 8 when you do your unit turns. They usually cost me about $2k more to get the unit back into rentable condition than a regular lease no matter what kind of systems/checkups/incentives/threats I put into place with them. They just don't care.

Wait a minute, Section 8 will not pay you $1,500 or 2x what apartments rent for BTW, lol. I hope you meant you are going to lease them to college kids when you said that!