Inflation vs Real Estate Investments

INFLATION VS REAL ESTATE INVESTMENTS

For a long time now, we have ignored the elephant in the room for this blog: Inflation. It’s not our intention to be economic whiz kids, or to stand on a soap box about any political issue, or to be hyper-analytical in our posts. But, we think it’s time to address a high level view of “what everyone’s talking about.”

Forgive us, but we’ll start at the beginning. Inflation is normal – yup, happens all the time. The inflation rate in Canada has an average of 3.1% from 1915 to 2021. The Bank of Canada has a 2% inflation target (as of today). Annual consumer prices gained 4.1% in August, the highest it’s been since 2003. Now, if you’re like me, paying bills and buying groceries, you probably wonder how it’s ONLY 4.1%?! All I can tell you is that my real expenses have definitely gone up more than 4.1% — somebody seems to be fudging some numbers. But to be clear, that is only my personal opinion/experience.

In the USA, consumer prices have reached a 30 year high (beats our 18 year high!), with 5.4% growth. Yet in Sweden, a country with no lockdowns during COVID, prices are already stabilizing.

Those are only a few of the news tidbits and stats. My point is simply that many people are “measuring” inflation differently, but we can all see the increase in costs. In our opinion, no one has that crystal ball to predict WHEN prices will decrease, and/or “by how much.”

So if we know that 1 dollar today, will NOT buy the same value of goods in 10 years, how do we plan for retirement or other life goals? To save $1,000,000.00 for a retirement nest egg in 10-20-30 years, how much to we really need to be saving today? And how does inflation impact real estate investors?

A lot can be said to answer that second question – we’re staying focused on real estate investing for busy working professionals.

1. Generally, as inflation rises, so do property values AND often rents rise as well. So long-term investment properties tend to keep pace with inflation. Compare this to a bank GIC. Inflation today is 4% ish, but that “safe” money at 2% return in the bank, is actually losing its purchasing power.
2. In times with high inflation, it can be difficult to get a mortgage (oh, like now for many Albertans you mean?). With less purchasing ability, many people continue to rent (rental demand is great for our long term buy-and-hold properties!).
3. When the cost of living rises, another source of income helps investors keep pace with rising expenses. Definitely an advantage in the current economies where prices are rising, but wages are not. This strategy can only happen when you buy properties with positive cash flow today, and well thought out expenses.
4. The cost of building today is already much higher than it was in 2020. While most experts anticipate building costs to stabilize soon, the price to build will rise over 10-20-30 years. Waiting for a perfect time to build is really anybody’s best guess. We already know that we don’t have enough supply to meet the current demand—what happens when immigration gets back to target levels in Canada? Buying properties today is most likely to provide more purchasing power (in Alberta lingo: more bang for your buck!); this is the same for investors and homebuyers.
5. And don’t forget about good ol’ leverage! One of the real estate investors best math lessons EVER! As an investor, I put 20% down on a rental – but I profit on and insure 100% of the cost of the asset. For example, I might spend $100,000 to buy a $500,000 home. If I get even a 3% return on that house over the years, I’m making 3% on $500,000.00, often compounded (Year 1 $15,000, Year 2 $15,450, Year 3 $15,913.50, …). The asset is only appreciating 3%, but my money ($100,000 down payment) is getting a Return on Investment of 15% — and this is using very conservative appreciation! We haven’t even included positive cashflow and mortgage paydown, or forced appreciation (with reno’s or a legal suite, …).

So what does this all mean to us real estate investors? Well, we could buy gold or bitcoin as “alternative currencies.” We could invest in stocks, ETF’s or funds that are predicted to outperform the inflationary market. Or we can keep investing in real estate assets: a strategy that has worked well for decades, if not centuries.

Today is a bit of a heavier read, but if inflation scares you, then it’s time to take action and protect your future Financial Freedom. There are paths out of the chaos.