I recently sketched out a quick graph of how real estate as an investment behaves over the long term. This is from an income property only perspective. Think of it as your real estate version of the dividend stock. There are many ways to analyze real estate as a hedge against inflation but I only really care about one; its ability to produce income. In order to do this we need to toss aside the appreciation aspect and look strictly at rents.
Income Property as an Inflation Hedge
The fact of the matter is rents rise over time and always have. If you are smart you are getting fixed 15-30 year mortgages (I admit I have a few on 5, 7, 10 year ARM’s but those were more speculative real estate investments). Side note, my CPA recommends getting only 30 year mortgages to keep payments as low as possible. By locking in for 30 years, your mortgage payment will be fixed. Some of your other costs will rise like taxes, insurance, cost of maintenance, and property management fees. But on average your mortgage payment of Principle & Interest will make up the majority of your costs of owing income property.Simply put as rents rise and your mortgage note stays the same, your cash flow increases until ultimately the mortgage pays off. At which point you are left with taxes, insurance, property management fees, and maintenance. All which when kept under control will yield a large net cash flow.
This is why income property can be seen as a great inflationary hedge.
Popularity: 6% [?]
If you enjoyed this post, make sure you subscribe to my RSS feed!
No related posts.
Related posts brought to you by Yet Another Related Posts Plugin.