Have you ever stopped to wonder why commercial investing works? There are a variety of reasons but one of the more powerful ones is inflation in conjunction with a properly structured mortgage. Hopefully, if you’ve advanced to the point in your investing career that you actually own a property, you’ve also realized the best mortgages are of the long-term, fixed-rate variety. In fact, to get the best bang for your buck from the presence of inflation you should NEVER pay off the mortgage, but rather “refi ‘til ya die” as Commercial Investing Center founder, Jason Hartman, likes to say.
The reason you never want to pay off a mortgage in inflationary times is that certain kinds of debt prosper and money loses in the presence of inflation. To understand this, let’s take a look at what inflation actually is. When we speak of inflation, we refer to a period of rising prices. If the government announces an inflation rate of, say, 4%, it means
that prices have risen that much in the previous 12 months. Put another way, a candy bar you paid a dollar for a year ago now costs $1.04. Four cents might not seem like such a big deal but it is, especially when multiplied at that rate or higher over decades. That’s why the chocolate bar that went for a quarter in your youth costs nearly two bucks now.
But the effects of inflation are not limited to cash and coins alone. Anything denominated in currency suffers. That means Wall Street’s darling assets like stocks, bonds, and mutual funds. Conversely, the asset that doesn’t suffer, and actually increases, is commercial real estate tied to a fixed-rate, long-term mortgage. Pay the mortgage off and you immediately begin to suffer the inflation effects like everyone else. Let it sit out there and the principal balance erodes over time, which is bad for the bank but good for you.
Whether you realized it or not, income property investing, either the residential or
commercial variety, is propelled by the hidden power of inflation (Top image: Flickr | Indiana Public Media).
Commercial Investing Team