Is real estate a good hedge against inflation? Episode #300

Is real estate a good hedge against inflation?

Hello. Welcome to Todd Miller TV. It’s the beginning of January 2013. As you’re probably aware, the fiscal cliff was put off a few more months with a deal between Congress and the President. And they basically said, “Hey, we’re going to raise some taxes and spend a bunch of money but we’re going to do it in the future. Let’s just raise the debt ceiling.” And what that means for you is that we’re probably going to start to see some – a little bit of inflation. And so, I want to talk about a couple of ways to avoid that potentially.

So historically, if you look at the two things that have been the best hedges against inflation, one of them has been gold because it’s a commodity. There’s a limited supply and it tends to change in value with inflation. So, coal prices have gone up recently because of that.

The other thing is real estate. Real estate is a relatively a scarce item. There’s not any more land. We take people to go undeveloped land right now to really have a big impact on that. We’re not seeing a lot of that over the last six or seven years. So you have real estate which is a really good hedge against inflation because as real estate – as inflation rises, the values in real estate tend to rise as well.

So a couple of things you can do. One is if you are a tenant, if you rent, how does this affect you? Well, if you’re a tenant and you rent and there’s inflation, you make an increase in your income potentially through inflation. But everything you buy is going to be more so when you go to a store, everything is going to cost more. And your rents are going to go up with inflation.

If you rented a house 20 years ago, you probably paid 300 or 400 bucks a month, maybe 500. Now, you’re probably paying over a thousand just for a house, right? So your rents will go up. One way you can avoid that is to own a house. So, if you own a house, this is how it widespread. So you buy a house and you get a 30-year loan on it. You lock-in your loan payment. So say your loan – say you were paying a thousand bucks a month rent, now you’re paying 800.

So first of all, you have two advantages. You save $200 a month rent there. But secondly, is that payment, it’s 30 years it’s locked in. It’s not substantially going to change. It might change because your tax or your insurance changed but your principal and interest doesn’t change. It’s 30, it’s fixed. Boom. So over – if things are – you’re getting raises and stuff is costing more, your real estate payment doesn’t change. That’s one way to hedge against inflation is to go from being a tenant to being a landlord. OK?

Now, the other thing you can do is let’s say, you already live in your house. It’s either paid off or you have a mortgage. It’s not going to change. You can get – buy an investment house because if the value – if you have inflation, the value of that house is going to go up as well so you’re hedging against it. The other thing is if you rent it out, you can now take advantage of the inflation by charging more rent to cover your – whatever your payment is. So you’re protecting yourself against inflation there. It’s pretty nice. You also can get some tax advantages out of it as well.

So, those are really two of the things you can do to hedge against inflation. You can buy a house if you’re a tenant or you can just start buying investment properties. I’ve had a lot of people come to me and say, “Hey, I want to sell my house.” And I say, “Hey, why?” Just, “Oh, I’m moving.” Well, rent it out. We always look at that, is it better to rent?

So it’s kind of an interesting scenario when my clients have come to me and said, “Hey, I want to sell.” And I say, “Well, do you have to sell?” Because if you don’t have to sell, you’re probably better off renting. But sometimes people just need the cash or just want to get out of – they’re moving and they don’t want to be a landlord and I totally get that because it can be painful to be a landlord which is why people hire us to be property managers because they don’t want to deal with those issues.

But I just wanted to sort of give you some ideas because if all your money is in CDs or securities, you may not want to have it all there because those necessarily aren’t always really good hedges against inflation. Of course historically, the worst hedge against inflation is cash. That’s like the worst, OK? Because it doesn’t appreciate at all and they’re just getting worth less in value every day.

So I thought I’d share that with you. Those are sort of my tips of how – to answer the question, is real estate a good hedge against inflation or is that the best way to be in inflation? But it tends to be a really good one and it’s just probably never been cheaper to get into owning a real estate at this point. So, I thought I’d share that with you. That’s my update for today and hope to see you on another video. Thanks.