To those who have learned how to read the economic trends, it has been painfully obvious for quite some time that significant inflation is on the horizon. Empowered Investor Network has long supported a strategy of fighting inflation through rental real estate that is financed with fixed-rate debt. The advantage of this strategy is that the debt payments will stay the same throughout the inflationary period as prices are pushed higher. While this is happening, the rents paid by the tenants will be consistently increasing as the scourge of inflation is eroding the value of the dollars that are being used to repay the mortgage.
Once the impact of inflation begins to unfold, it will result in more investors selling bonds to avoid seeing their wealth destroyed. This will place upward pressure on bond yields as investors will no longer be willing to accept rock-bottom interest rates for government treasuries. As the treasury yields are pushed up higher and higher, there will be a ripple effect to mortgages that are indexed to these treasury notes. This increase in mortgage interest will increase the ‘effective’ price of real estate since the same monthly payment will not buy as much house as in previous years. As this stall in purchasing power ripples through the market, it will place downward pressure on prices and appreciation. At this point, buying-in to the real estate market will become a much more tenuous matter since interest rates will be higher, creating increased mortgage payments and lower cash flow to owners. During this time, the investors who locked-down low fixed rate mortgages will be watching their profits expand while their costs stay flat.
The bottom-line is that this tremendous opportunity will not persist forever. Once the rocks begin to fall, it is likely that the avalanche will quickly follow. Prudent investors should seek to be ahead of the masses, and lock-down their investments while rates are still low, prices are still depressed, and opportunities are still plentiful.
The Solomon Success Team
Flickr / Ben Zvan
