Category Archives: real estate

Inflation: What it is and How to Use It

Inflation has essentially been around since currency was created. But what is it? The Marriam Webster dictionary defines inflation as:

“a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services”. That’s nice to know but how does this effect us in our daily lives?

Well the “rise in the general price level” can mean things like groceries, fast-food, restaurants, as well as other things like insurance, utilities and housing (both for buyers and renters).

With this cost increase usually happening year over year, what are some things we can do to minimize this?

Well the first big thing is planning. If you are considering retirement in a decade, realize that the cost to live then will be higher than the cost to live now. Do a rough calculation on the average rate of inflation (roughly 3.5%). Over ten years the cost of everything will most likely rise 41%!

After understanding the impact of inflation and incorporating it into your estimated retirement costs, it’s time to talk about investing. The best types of investments for inflationary periods are stocks and real estate. The reason for this is because stocks’ value (in the long-term)is based on the earnings of the company and earnings generally go up with inflation. So off the bat you have a built in inflation protector.

The second ideal investment, real estate, is a little more complicated to invest in. A common “investment” people choose to make is in their home. While it is certainly the case that homes usually go up in value, the decision isn’t a clearcut one. (Check out my blog on the rent vs buy debate)

Another way to invest in real estate is to buy rentals. This is more hands on and therefore takes more time and energy. If you are comfortable with this then by all means go forth and invest! However a lot of people find the intensive commitment inherent in this type of real estate investing too much to handle.

If this is the case with you you can consider another options, REIT’s. Real Estate Investment Trusts, or REIT’s as they are called, involve the investment of large groups who buy large quantities of real estate. The earnings and appreciation from this real estate is owned through a large quantity of shareholders who buy part of the ownership, like a stock.

While this is certainly an option, I find REIT’s to be remarkably unimpressive long-term compared to stocks or direct real estate investments.

Whichever path you choose to take, be wary of the inflation hurdles and the best ways to overcome them.

R.E. Strategies: Investing Debt Free Vs. Leveraging Properties

When making financial plans there are two basic schools of thought to get your information from. One group says that debt is bad, and that you should limit or eliminate all debt as soon as possible. The other group argues that getting rid of consumer debt is wise, but that borrowing money to buy investment properties or start businesses can be a smart investment.

Who do you listen to? The answer is that it depends. For example let’s look at the debt approach.

If your strategy is to purchase single family homes at favorable mortgage terms, receive monthly cashflow, grow equity and increase the value of the property over time then this strategy may work. However the alternative, no-debt strategy would leave you saving up and purchasing the whole investment with cash. Sound difficult? You bet!

So which strategy is better? Well that depends on which provides a better, risk-reward ratio. The following are a few risks we should be aware of when investing in real estate: Law suit risk, credit risk(that we won’t be able to pay the mortgage, thus losing the property), cashflow risk (that costs will rise to the point where we don’t receive adequate cashflow). These are just a few risks.

Of these three risks, which ones are effected by taking out a loan? Credit risk and cashflow risk are both effected. Credit risk isn’t even a concern with the no-debt approach(because there’s no mortgage) and cashflow risk increases with the debt approach because there’s increased monthly expenses in the form of loan payments.

A different risk we haven’t discussed yet is the risk of loss of capital. For example let’s say you make the investment in a limited liability entity and are thus only able to lose the money you have into the deal. With the all-cash approach your risk is much higher than the debt approach.

Overall the risks of using debt are slightly higher. However in terms of returns the returns can potentially be much higher than if you only use cash. In addition, purchasing a property with cash takes longer to save up for , lengthening the time it takes to make the original investment in the first place.

So which is better? It all comes down to if you are willing to take slightly more risks to potentially make much more ROI. As long as you are sure to never borrow more than 80% of the value of a property, the debt approach will usually work slightly better. Lastly, the most important takeaway is that simply investing is the most important step. So stop waiting and start taking steps towards financial freedom today!