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Inflation: The Investor’s Friend

Inflation. That dreaded word, feared by consumers all over the country as a messenger of higher prices, less buying power, and a struggle to keep up with the usual standard of living, rears its head nearly every year. Statistics for the third quarter of 2012 indicate that the annual rate of inflation was holding at 2 to 3 percent on most consumer goods.

Inflation touches us all, mostly negatively. The dollar doesn’t go as far at the store or the gas pump, and people on fixed incomes or those facing a job loss have more of a struggle just to stay in the same place. There’s no upside to inflation – or is there? According to Jason Hartman, inflation’s silver lining offers some very real benefits to new investors retiring from careers in public service..

It’s been said that owning real estate free and clear is the ultimate hedge against inflation because equity represents security. But within the framework of Jason Hartman’s investing strategies, debt is a tool that can be used creatively to protect an investor’s income flow from mortgaged properties and offer some safeguards against the hazards associated with equity.

The return on investment, or ROI, for income properties, might also be called “return on inflation.” The ROI, so important in property investing, is derived from a set of factors including appreciation of the assets, cash flow, tax benefits, and principal reduction – which is actually aided by inflation. As the value of the dollar shrinks, so too does the “real” value of a mortgage debt

Inflation’s benefits for income property investors hinges on the difference between nominal and real value. As the value of the dollar goes down, with less buying power than before, so too does the debt it represents. As an example, under 10% inflation, a mortgage nominally worth $1 million would actually be worth $900,000 – a reduction in the value of that million-dollar mortgage of $100,000.

Combined with the ongoing income from tenant rents, which also contribute to paying down debt, inflation reduces the “value” of mortgage debt. And maintaining mortgage debt is the key to successful real estate investment, allowing investors to reap the tax and cash flow benefits of property ownership without a loss of their own assets.

Equity, from properties owned free and clear, is vulnerable to the effects of inflation and can be risky too. That means that a mortgage with rates fixed for thirty years is safer than owning properties outright – the mortgage is a hedge against income loss, and inflation reduces the value of the debt itself over time.

Inflation attacks nearly every aspect of consumer life. For many people, the fact that a dollar doesn’t buy a dollar’s worth of goods during periods of inflation means financial hardship. But inflation redistributes wealth, and for investors in income property, that means a reduction in the real value of mortgage debt – a reduction in loan principal that helps to maximize the return on their investment. (Top image: Flickr/cletch)

The Heroic Investing Team


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