Real Estate as a Hedge Against Inflation

real estate inflationWhy do houses appreciate? It’s not because they get better with time because they most certainly don’t. They can actually get pretty worn out and require substantial repairs. So then what causes the famous appreciation so many people buy houses for?


The CNN news headline on TV this morning was “America’s economy held hostage!” Merry Christmas everyone, we’re all doomed. At least that seems to be the talk now that the holidays are over and consequently we have nothing better to focus on except this thing they call the Fiscal Cliff. If you haven’t heard that term you are obviously living in hole. It’s on every news channel, in every paper, and I’m actually surprised more sitcoms haven’t made fun of the potential loom that hangs over us.

What is Inflation and Why Do We Need a Hedge?

HedgeWhat does the Fiscal Cliff mean for all of us? I really don’t know nor am I going to try to analyze it here. I am certainly going to hope for the best but I wouldn’t question you if you say we are all doomed either. I do know one thing though: more than ever, I know it’s time for me to be in control of my money. I don’t claim to be a financial expert by any stretch but I do know that if inflation is going to continue, which follows right along with this Fiscal Cliff idea, I want to be smart with my money by keeping it as protected against inflation as I can.

Thinking in terms of Inflation for Dummies, inflation basically means:

  1. More money is created
  2. The value of the dollar goes down
  3. Therefore prices go up

I have $100. The government prints more money. What I can now buy with my $100 is what I could have bought with only $80 before the new money was printed. Translate that to a real-world example: A gallon of milk in 1970 cost roughly $1.15. Today a gallon of milk is about $4.00.

Hello, inflation, it’s nice to meet you.

There are a lot of factors in thinking about where the safest places for your money are. Stocks, CDs, banks, real estate, commodities, under your mattress, in outer space…everyone has different opinions. I’m not here to say what is right or wrong about each option, but I am here to explain how real estate can protect against this little witch we call inflation.

How Real Estate Can Fight Inflation

Real estate is one of the few assets that react proportionately to inflation. As inflation occurs, housing values go up and rents go up. Can you then see why owning real estate may be a good thing? If not, let’s put this into perspective with a simple hypothetical example.

In 2012, you buy a house for $100,000. After the world doesn’t end that year and the government begins to drive off the Fiscal Cliff, the financial markets become a mess and inflation is in full-bloom for the next 10 years. Now 10 years later, because of inflation, this same house is worth $180,000. You now own an $180,000 house that you only had to pay $100,000 for! Sounds like a deal to me. You basically have $80,000 in free dollars now.

Inflation: The Landlord’s Friend?

Let’s take this up another notch. Instead of living in the house yourself, you decide to rent it out and you begin collecting $1,000/month in rent. At $1,000/month you net $300 after the mortgage and other expenses. At the end of a 10-year stint with no inflation, you would have pocketed $36,000 in passive income (woot!). However, thanks to the same inflation that jumped the house’s value over those 10 years, you had to increase the monthly rent by $100 every other year. This would put the amount of passive income you pocketed at $50,000 instead of $36,000 (double-woot!). Although that $50,000 doesn’t take into account any increases to property taxes, insurance, etc., so l am going to put it back down at $45,000 before someone argues me on that one. Regardless, inflation has just put a nice extra chunk of cash in your pocket! $9,000 specifically in this case.

One property in only 10 years, thanks to inflation, has put $89,000 in your pocket you wouldn’t have otherwise had. Actually, it would be more than that once you consider how much you reaped in tax benefits as well, but I’m trying to keep it simple.

Note: Going along with the idea of trying to keep it simple, I acknowledge that I have ignored a lot of factors here associated with appreciation, taxes, income and expenses, but the point is to focus solely on the impact of inflation and nothing else. I also didn’t go with any particular % inflation either but rather used simple numbers to show the point.

If inflation occurs, real estate is one of the only inflation-adjusted assets other than commodities. While most of the population believes real estate is a risky investment, I believe real estate is one of the only safe investments left given our continuing financial crisis.

source: BiggerPockets

Homeownership as an Investment

house-and-goldIn Real Estate: Today’s Golden Opportunity we compared the current housing market to the market for gold about a decade ago. Some commented on the fact that you can’t compare gold to real estate as an investment as gold is a very liquid asset and it would take more time and effort to sell a house. We were not trying to make the case for real estate vs. gold as an investment in our blog. We were just showing that all investments go through cycles and that the best time to buy any investment may be when everyone is saying not to.

However, since the subject of comparing real estate to other investments has come up, let’s take a closer look. There are two major advantages to investing in a home of your own rather than another option:

You Can’t Live in Your IRA

When you buy your own home you are not taking available dollars away from another investment. You are replacing one housing expense (rent) which has no potential for a return on investment with another (mortgage payment) that does give you an opportunity for a return. We realize that there has been research showing that over the last 30 years renting has been less expensive than owning. That research also says that if you invested the entire difference between the rent payment and mortgage payment you may have done better financially. There are two challenges with this conclusion:

  1. Today, in the vast majority of the country, renting is actually more expensive than owning a home.
  2. History has proven that tenants DO NOT invest the difference in their rent and mortgage payments.

Today, studies show that owning a home is no more expensive than renting a home. However, even if this wasn’t the case, history shows that owning a home creates greater wealth.

Paying a mortgage creates what financial experts call ‘forced savings’. The Joint Center for Housing Studies at Harvard University released a study last year titled America’s Rental Housing: Meeting Challenges, Building on Opportunities. In the study, they actually quantified the difference in family wealth between renters and homeowners:

“[R]enters have only a fraction of the net wealth of owners. Near the peak of the housing bubble in 2007, the median net wealth of homeowners was $234,600—about 46 times the $5,100 median for renters. Even if homeowner wealth fell back to 1995 levels, it would still be 27.5 times the median for renters.”

There Are Tremendous Tax Advantages to Investing in a Home

There is no doubt that selling an investment such as gold is easier than selling your home. However, this liquidity comes at a price. The price is called capital gains. That is the tax you pay on any financial gain you receive from the investment. This tax doesn’t apply the same way when you sell your primary residence:

Theresa Palagonia, a CPA and the Accounting Manager for the firm G.S. Garritano & Associates, was good enough to explain the Home Sale Exclusion Rules:

“You may qualify to exclude from your income all or part of any gain from the sale of your main home.

Maximum Exclusion

You can exclude up to $250,000 of the gain on the sale of your main home if all of the following are true:

  • You meet the ownership test.
  • You meet the use test.
  • During the 2 year period ending on the date of the sale, you did not exclude gain from the sale of another home.

If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions listed above.

You may be able to exclude up to $500,000 of the gain on the sale of your main home if you are married and file a joint return and meet the requirements. (Special rules apply for joint returns.)

Ownership and Use Tests

During the 5 year period ending on the date of the sale, you must have:

  • Owned the home for at least 2 years, and
  • Lived in the home as your main home for at least 2 years

Certain exceptions exist in which you may qualify for the exclusion without satisfying the tests listed.”

Bottom Line

Every investment has pros and cons. That is why there is such an assortment of great opportunities. Real Estate has been, is and always will be one of those opportunities.

source: KCM

House Flipping Returns Due To Demand, Inventory Shortage

Trassenheide,_Die_Welt_steht_KopfThe housing market is picking up steam like a freight train, but we’ve unfortunately run into a major roadblock: lack of inventory. Tons of homebuyers are actively searching for their dream home, however their search has turned into more of a journey.

The problem is that a vast majority of homebuyers, especially first-time buyers, prefer move-in ready properties. They’re simply looking for a roof over their head, not an enormous home improvement project. Renters feel exactly the same way and either run from outdated properties or squeeze landlords for a rock bottom price.

Due to high demand, house flipping is making a major comeback with real estate investors scooping up properties left and right. In fact, according to the National Association of REALTORS®, investors purchased 18 percent of houses in the U.S. in August 2012. The properties will either be remodeled and rented, or flipped for profit within a short amount of time.

Lawrence Yun, NAR chief economist, stated: “The West and Florida markets are experiencing inventory shortages, which are placing pressure on prices.” To capitalize on such shortages, house flippers are flocking to Florida and the West Coast.

When flipping houses, investors tackle two things first: kitchens and bathrooms. “People buying a house look first at kitchens and baths,” says Kermit Baker, director of the remodeling futures program at the Joint Center for Housing Studies at Harvard University. Plus, statistics show that bathroom and kitchen upgrades are one of the best ways to boost interest as well as value.

As house flippers continue to purchase and remodel properties, we can expect the quality of homes for sale to improve. Hopefully higher quality listings will spur more home sales.

source: Fix&FlipNet

Various ways to invest in real estate

Forbes-2009_08-03_Still_Get_Rich_in_Real_EstateForbes reporter Morgan Brennan shares insight on three ways to grow wealth in the housing market. Real estate investment trusts, turn key investment properties, and renting and managing homes as a traditional landlord are good options now and in the future. Watch the video for details.

Rising Rents Improve Investors’ Returns

real estate investorWith rents rising faster than last year, the picture for residential real estate investors is getting even better than it already was as a result of once-in-a-generation prices and low interest rates, according to the founder of a leading Internet platform for investors and real estate professionals.

Greg Rand, CEO of OwnAmerica, downplays concerns over near term price declines and urges investors to take a long view of the opportunities.

“This is a long term investment,” says Rand, who differs with what he calls the “get rich quick” approach to investing. “Rents are a steady return on your investment through the years, leaving you with an attractive asset when prices improve. And they will. The best profits in real estate accrue to long term investors who take a long term view.”

Rents are growing at a 5.17 percent annualized rate compared to a 4.72 percent at this time last year Assuming effective rent grows at the same rate in the next four months as it did in 2010, the full-year total would fall just below the historic highs of 2000 (6.18 percent) and 2005 (5.81 percent), according to a report from Axiometrics Inc., a provider of data and analysis on the apartment market.

With 1.4 million new renters this year, apartment construction can’t keep up with demand. Tenants, especially former homeowners forced from their homes because of the economy, are increasingly turning to single family homes owned by investors, especially in high foreclosure markets like Las Vegas.

During this year, investors have accounted for between 20 and 40 percent of monthly existing home sales, according to surveys of Realtors by Campbell/Inside Mortgage Finance and the National Association of Realtors. Yet, the investor market share may increase even more next year.

A survey by in April found that by a three to one margin, investors plan to be more active in their local markets compared to typical homebuyers in the next 24 months, and 69 percent of investors say it’ll be easier to find properties in the near future.

Most investors are newcomers. Fifty-nine percent (59%) said they’re new to real estate investing, with 33.5 percent considering their first investment purchase and 8.5 percent in the process of buying and selling their first investment property. Another 17 percent said they just completed their first transaction and plan to make more. Only 36.5 percent have experience in more than one property transaction.

Author of “Crash! Boom,” Rand argues that even in the Great Depression, owning real estate was always better than not owning real estate. Holding real estate for the long term has always been a formula for success and most family wealth has been accumulated by purchasing real estate and keeping it in the family for many generations. Real estate plus time usually equals success.

There are 6 million people who went from being owners to being renters, Rand says. “The stars are aligned to make this the best time in modern history to be a landlord,” he wrote in his book.

If you are interested in exploring investment opportunities, call me @ 206-713-3244 or email