The Mother of All Investment Trends: Inflation

Think inflation might be with us awhile? There have been a grand total of two years out of the last fifty-seven that haven’t seen at least some level of inflation in the United States. To us, that seems like a pretty strong trend that has only intensified since President Nixon took the country off the gold standard in 1971. If you throw out 2009, when Obama’s recession resulted in an -0.4 rate of inflation, or deflation, rising prices and shrinking dollars have been a reliable fixture in the economy at a rate of three to four percent annually.

That, friends, is a trend.

Investors know there is serious money to be made by finding a trend and riding it for all it’s worth. And while investment trends come and go – gold is a good example – there is one trend we’ve been watching for a while that doesn’t seem to be in danger of going away any time soon. You know the name: inflation. While the idea is sometimes initially hard for some people to wrap their brain around, exercised properly within the context of income property investing, inflation is a dandy little asset that can tuck the kind of returns into your pocket that make Wall Street seem like a grand waste of time.

But how do you make money from inflation? In short, buy rental properties financed with long-term, fixed-rate mortgages. In this case, the longer the better. We like to go out at least 30 years – longer if we can get it. The point here is to never pay the thing off because you’re making money by being in debt. Here we should stop and point out we’re not talking about the bankruptcy-inducing consumer debt that far too many Americans indulge in. That stuff we call destructive debt.

On the other hand, a properly structured mortgage tied to a piece of income producing property is constructive debt, which can be a wealth creating machine if you give it half a chance. The dirty little secret about inflation, which isn’t really a secret at all, is that it reduces the value of, not only currency, but all currency based assets like stocks, bonds, and mutual funds; all Wall Street offerings, by the way. The bottom line is these kind of investments often don’t even return a profit that exceeds annual inflation, especially when we take into account the highly probable reality that the government chronically under-reports the true inflation rate.

But why, pray tell, do we suggest income properties and mortgage debt as a serious alternative to the Wall Street hooligans? Follow this three step process:

1. Inflation devalues the worth of money
2. Your mortgage is NOT money, it is debt
3. The real value in a mortgage (held by your banker) declines thanks to inflation

Ergo, over time inflation creates wealth for you while the sad little banker is left holding a mortgage IOU that shrinks smaller every year. If this idea doesn’t sink in right away, don’t worry, we’ll revisit it soon. (Top image: Flickr | Tax Credits)

The Commercial Investing Center Team


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