It is well known that income producing real estate is one of the best investments you can make. What is less well known is that income producing real estate allows you to get paid to borrow money. At least that’s been the case historically.
The reason for this has to do with the reality of inflation. In times of inflation, your best protection against the declining value of the dollar is high quality, long-term, investment-grade, fixed-rate debt attached to a piece of income producing property. In a nutshell, the right kind of debt is good.
Here’s how it works:
Assume that you purchased a property back in 1979 and that a dollar was actually worth a full dollar ($1.00). Then, thirty years later you find that same dollar worth only $0.24 because of continued inflation (driven by the government’s absurd economic policy).
Although the overall purchasing power of the dollar has decreased over those thirty years due to inflation, the principal balance on your long-term debt is never adjusted in step with that inflation. By paying down your fixed-rate debt with continually CHEAPER DOLLARS than those you originally borrowed with, you are effectively saving yourself a lot of money each and every year.
Now, think about it another way:
Assume you purchased $1 million worth of income producing property with a combined mortgage balance of $800,000. And let’s assume that over the course of one year you didn’t pay down any principal and there was a 4 percent rate of inflation. Your loan of $800,000 would now be worth only $768,000 in terms of real dollars. That’s a reduction of $32,000 in one year!
Effectively, you just got paid because of inflation. And that’s how you get paid to borrow money.
Now if you believe that inflation has been floating around 4% over the last few years, as the government would have you believe, then your $800,000 loan would only be worth $531,866 ten years from now.
The fact is that “real” inflation has been much higher than that reported by the government. Many experts believe inflation to be over 8% and some feel that we’ve seen as much as 12% in the recent past. And think about the strong possibility of our economy getting hit with hyper-inflation in the coming years from the excessive governmental spending on bailouts, reform, and other big-government projects. Debt and inflation work well together when you’re the borrower.
This is a great time to own long-term, fixed-rate debt tied to income producing real estate.
