In the first three articles, we discussed your ability to leverage large real estate assets with very little of your money and have all your expenses paid with other people's money (OPM), so you can reap huge profits as your real estate investment appreciates. Unfortunately, no discussion of money can avoid the subject of INFLATION.
Inflation is the increase in the prices of all goods and services, which is realized as a decrease in the purchasing power of your dollars. Because of inflation, today's dollars are worth more than tomorrow's dollars. Typically, the Consumer Price Index, All Urban Consumers, All Items is the best measure of inflation. Inflation can steal your investment profits unless you have the right investment, real estate.
In Part 2 we discussed the actual appreciation rates for the various investments. Those rates were not inflation adjusted. The actual annual appreciation for a saving account since 1963 was just 0.6% as measured by the return on 3-month US Treasury Bill. But over the same time the annual inflation rate was 4.4%. Investing in a savings account is like throwing money away. It loses buying power.
The value of stock, a financial instrument, is based on the fortunes or losses of the corporation issuing the stock. The value of a company will decline as inflation erodes the profits of the issuing corporation. Over time, as inflation is reduced, the fortunes of the company may improve and subsequently the value of its stock. The annual appreciation of stock since January 1963 is 7.98% as measured by the S&P500 index including splits and dividends. During the years between 1963 and 1983, the value of stocks actually declined when adjusted for inflation. It took the longest economic expansion in US history, starting in 1983, to make stock out perform inflation.
Real estate is durable good, which means it yields services or utility over time. The investment value is intrinsic to the real estate because it is not to a piece of paper backed by the performance of a company. Real estate investment, as a durable good, will increase in value as inflation increases its replacement cost. In many ways the bottom of the real estate correction is the cost of new home construction.
Unlike a savings account and stocks, real estate investment is the only true hedge against inflation. The annual appreciation of real estate since January 1963 is 6.16% as measured by the average price of a US home. Like stock this is above inflation rates. However, at no time did real estate lose value relative to inflation and this is assuming that OPM only covers 90% of the expenses including the mortgage! This inflation hedge is protected in large part by the massive leverage enjoyed in real estate investments. Historically, real estate is the only investment hedge against inflation!
Real estate investments have made more millionaires than perhaps any other form of investing and there are eight powerful reasons why.
YellowMustang Holdings has helped many of our clients achieve their investing goals by first understanding these eight basic investing advantages that has made real estate the most successful investing method of all time. In the first four articles we showed you how enormous these benefits can be and we are only half way through these articles. The next article is on taxes.
Mary Thomsen
YellowMustangHoldings.com
Owners of numerous rental properties around the United States, Mary and her husband have spent many hours helping others get started with buy and hold investing. With the change in the market, we are changing our strategies to maximize the advantages waiting for investors. Our exposure to various markets has led to a real estate marketing business. Available properties may be found on our web site http://www.yellowmustangholdings.com or visit our blog at http://www.my-us-wholesaleretaildeals.com/
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