Last updated on February 20th, 2022 at 07:59 pm
Your 401k and that CD are fading away. What can I do to protect my money? Invest in appreciating assets. Real estate is the best protection against high inflation. Specifically, real estate that generates income as well as appreciation. Residential rental real estate is your hedge against inflation.
Take a hard look at where you have placed your hard-earned money. Are those investments capable of withstanding 8%+ inflation? There seems to be no end to this cycle of insight. It’s best to look further out and make changes now. Don’t panic, take a measured approach to the actions you will take to mitigate the ravages of inflation. This new tax, worse than any Washington has levied on us recently hits everyone and in particular those with fixed incomes.
Many of us were able to refinance our homes when interest rates were below 3%, that’s a great first step. Rates today hovering at 4% are by historical standards are low. This will change in the future. Now is a good time to buy residential rental real estate your hedge against high inflation.
How do I get started?
I recommend you to two sites for more information about residential rental property. Keyladder for a discussion about residential rental real estate and how to invest then go to Logan-Anderson, Gulf Coastal Realtors where you can read their blog articles and browse for properties. With help from knowledgeable people e.g. those recommended above, you can find a good property that generates current income and will appreciate it.
Four basic elements make investing in residential rental real estate a good proposition. First, the property will generate income every month over operating costs. This can supplement your retirement fund. Second, some of that income will be offset by depreciation, the government’s gift to us. Depreciation is applied against the income to reduce the taxes you own now.
Third, every month the tenants will pay off your mortgage. Yes, a mortgage. You do not want to pay cash in this environment when you can borrow at 5% and earn a 9 or 10% monthly cash return. By year’s end, the amount you owe to the bank will be reduced which is income to you when you sell the property.
Fourth, your property will appreciate based in part on inflation and in part on demand. At this time both inflation and demand are in alignment. This means that with a shortage of property values are rising and at the same time the cost to build new properties is rising. Existing properties become a better value when compared to the cost to build a new one.
Residential rental real estate your hedge against inflation
Considering the four elements of residential rental property above, you can see that each one has its job to do. When rents increase, your income increases, and the value of your property goes up if it’s a multi-family property. Multi-family properties 2-4 units are priced based upon the income they can generate.
You must keep your rents at market rates always. If you buy a property outside of the area you live in, you will want to hire a property manager. I recommend that you hire one regardless. if you are retired, you do not need any more stress than necessary. Telling tenants that their rent will increase is something that not everyone can do. A good reason why so many owners do not earn sufficient income to keep their properties in good repair.
I mentioned above that you should obtain a mortgage. You will be required to put about 20% down to buy a property unless you buy a vacation property and decide to rent it when you are not there. Those mortgages require about 10% down. Always use someone else’s money to buy your residential rental properties when the spread in interest is as it is today.
Do I need to buy locally?
No, many of my readers live in high-cost states where buying a residential rental property is simply not feasible. Buy in another market where the economics align. Meaning that the rents are greater than the costs generating a profit. And where you can buy multiple properties for the cost of a single one in your area. A good property manager can ensure your investment is protected and the funds are dropped into your account every month.
I have been buying residential rental property for years. I have purchased the property in several states and Europe. The managers that I have selected have done well for me. They collect the rents, fix things that need to be fixed and keep me informed of the local market. Every year they discuss the rents and how much they will increase. They, not me communicate to the tenants.
One property in particular that I purchased many years ago was located in the Phoenix area. My brother found it on buying trip and I told him to buy it for me. I sold it recently after owning it for 12 years. During that entire time, I had never seen it. Photos of course but not a single visit. It was not necessary. I worked out the numbers and they made sense. I bought it and had it professionally managed.
Why not gold?
Gold is a unique investment similar to other precious metals and art. Gold can appreciate but will it? Does gold pay rent? No. Does gold pay off the cost of ownership and generate appreciation? No. There are only two things gold can do. Go up or down in value. Gold does not pay interest.
If you want to buy gold because of fear of debasing our currency, please do so. Most investment advisers (I am not one), tell people to diversify their investments. I agree with that. There is a place in a portfolio for almost everything. The problem that I have with some advisers is they do not advise on purchasing residential rental real estate your hedge. That’s because real estate is different from all of the other paper investments.
Gold does have one advantage, you can touch and feel it. You can’t touch and feel equity or mutual funds. You can touch and feel real estate.
Stock/Bond Market
I was just watching some experts telling their audience that in 2022, the stock market has been losing steam. Some stocks are down as much as 50% during the period from December through February 2022. The FED will be increasing interest rates all year to control inflation. This affects companies that have been borrowing at very low-interest rates. Many of their loans are variable interest and they will be looking to find ways to offset the higher payments.
You should consult your financial adviser about the markets regarding rebalancing your portfolios, just leaving them unattended at this time is not a good idea. Investing all of your hard-earned money in the market is also not a good idea. You need to diversify into other types of investments as mentioned above residential rental real estate your hedge.
More information for you
Please read other articles on our site about this and similar topics. You may want to visit Christies Gulf Beach Rentals to see what vacation rental properties look like and how much they rent. Vacation rentals are one way to invest in residential rental property your hedge. Visit Keyladder for more specific information about the concept of buying residential rental property.
