To have runaway inflation or not to have runaway inflation? That is the question.
My bet is, we’ll see more significant inflation soon. Prices of construction material and food have skyrocketed already. Maybe this is partly a COVID fueled spike, but I doubt they will come all the way back down.
Inflation has not been as bad as I expected. This is probably because workers with computers, the internet and cell phones, along with businesses that use AI, robots and on-demand supply chains, have become more productive.
Inflation is powered by supply and demand and producing more, with less human effort, is deflationary.
How much more technology boost will we get? How will the current COVID supply chain, labor deficits be resolved? How will human activity and consumption alter? These are a few of the inflationary questions we (or at least I) cannot answer.
I am sure I don’t know all the answers to inflation so have tried to hedge my investments with real estate holdings… mainly residential; and rural property.
I prefer real estate to equities (though long term equities have produced higher yields) because I enjoy the process and profitably doing what you love is the number tow rule of investing in my book.
In addition, I worry that as long as the threat of inflation and higher interest rates lurk around the corner, the stock market will be at risk of a serious drawback that could take a decade to recover. Most investors in their upper 70s don’t like ten year draw downs to their assets.
Real estate is a good hedge for my situation as it can be a good inflation hedge when inflation is high, but it’s also a good income producer and easy investment when inflation is low.
I like residential real estate because I can understand the utility of houses that people live in.
If the real estate market is hot there are growing numbers of buyers willing to pay high prices. If the real estate market collapses there are growing numbers of renters looking for a good deal.
Many readers have asked me what’s the best way to invest in real estate.
My reply is that there is no best way. Each of us are unique in age, experience, risk aversion, capital and financial needs. We all need an individual unique buying proposition that fits our needs.
Unique Buying Proposition
I have bought and sold many dozens of properties in four countries and four states, ranging from tiny Florida cottages like this…
to a big old centuries English old manor house like this. Princess Anne was a next door neighbor!
One time I purchased an entire block of condos in Ecuador.
and of course as long term readers know, over twenty years ago Merri and i purchased our beloved farm.
I have purchased real estate in busy cities, isolated countrysides, tiny villages, in the mountains, on flatlands and on the sea.
Many of the properties were vastly different from others I bought, but each contained one vital factor from my point of view. Every purchase matched up to my unique buying proposition.
I say unique because we are all live in a different set of circumstances.
A few of the unique characteristics in my life that have knitted my unique buying proposition included:
- My global travels that helped me spot distortions in real estate. A few examples include seeing distortions between rising real estate prices in the US and London in the 1970s tahta helped me make my first investments in London real estate in the 1970s (a really good idea). Distortions between Naples Florida real estate prices and prices in other US property markets helped me invest in Naples well before it boomed. Then the high prices in Naples helped me compare the differences in beach property prices ($2 million in Naples-$5,000 for a similar property in Ecuador). Rising prices in Ecuador when prices were collapsing in Florida brought me back to the USA.
- Writing about investing and real estate helped me be aware of distortions. Not only was I traveling globally, I was intensively looking at real estate opportunity in these travels.
- Not being in the real estate business. My business has always been writing and publishing. Real estate has always been a way of preserving my savings, not of producing my income. This reduced demands for my investments to turn over quickly. I could wait until circumstances were in my favor to buy or sell.
- Always investing in what I love! Most of my real estate investments have been based around my lifestyle. When I loved living in London, I bought (and lived n and fixed up) houses I lived in. Ditto in the West country of England, the Dominican Republic, Naples, Florida, the Blue Ridge of North Carolina, Ecuador and now Central Florida. My real estate investment created three benefits… profit opportunity… something to write about and a low stress… fulfilling lifestyle!
Two foundations of the buying proposition.
My unique buying proposition begins with an anchor of value.Get a FREE Report on creating Anchors of Value here.
I use rent to price ratio as my guide. Normally I’m looking for a ten to one ratio. I want a 10% cash flow on the investment. If a house costs $150,000, I want to see a $15,000 a year rent. I have found after deducting management fees, taxes, insurance and maintenance, I make about a 4% to 5% annual income, plus whatever capital gains develop.
The second foundation is my liquidity and knowing what I want. My unique buying proposition, is a low price offer, matched with a very fast inspection and closing. I work hand in hand with a property inspector I trust and have used for decades and plan in advance when he can inspect a property before I offer.
Typically I’ll make an offer with a three day inspection period and closing as fast as the escrow agent can go. The norm is a 15 day inspection period and subject to inspection.
Right now for example, in Central Florida, the price to rent ratio is way out of whack. In 2010, I could buy a house for $125,000 and get $1,000 per month (or a bit more). Today the same house might cost $220,000 or more but rent has only risen to $1,400 and property taxes have skyrocketed (up 25% in one year)!
However in the last six months, I have still be able to buy three houses at $150,000 (despite numerous higher offers) that I can rent at $1,400, because the seller needed to sell quickly or did not want the strain of waiting for a long inspection and delayed financing process.
I miss getting some great properties I would like to own, but stick to this one formula that works for me.
My assets are readily available cash, knowing exactly what I want, a system of checking the property out and a willingness to walk away from any deal that does not give me the price to rent ratio I require. I am always polite, even apologetic for my offers, but I explain the benefits of my offer and why it is what is is and can’t be more.
I know many people who invest in real estate or are in the real estate business. Each has their own unique buying proposition. One friend only builds new houses on land he has accumulated over decades. Another only buys from estates. Another buys on the court house steps. Another plans, builds and sells entire communities.
The formulas for each differs greatly, but all have one thing in common. Their unique buying proposition fits their circumstances and they stick to it.
Begin your unique buying proposition by creating an anchor of value. Then let your situation evolve from there.