What happens to RE during deflation?

Question

I am new to RE and currently getting ready to jump in after studying through lots of podcasts, articles, books, etc. But (always a but, right?) I recently came across this 2010 video from Robert Kiyosaki - https://www.youtube.com/watch?v=HptRcmUGRAk

Considering that FED is not ready to raise rates and central banks around the world are reducing rates and/or pumping money into the system including China and India. And considering that US official inflation numbers are sitting on the fence between inflation and deflation even after so many years of easy FED policy, the hyper scenario mentioned in above video seems like a real possibility to me.

But I have no prior experience in RE or in deflationary environment. I have heard here that as long as the property cash flows, just get in.

So does anyone here have prior experience in deflationary environments and how does it impact your RE portfolio? Would you mind sharing your wisdom?

Please let me know if my question is not clear.

Thanks.

J Scott Hamilton · Answer

It depends on what causes deflation.

1) Too much stuff chasing too few buyers.  This happens when there is a depopulation, such as impacted Rust Belt communities  in the 1980s - 2010s.  Properties and rents get cheaper, because it is a buyer's market. Many properties will not cash flow, period, and many get bulldozed and pushed into their own basements as decay eventually caves them in.

2) Tight money supply; a Central Bank doesn't keep enough dollars in circulation.  People may want to buy, but they can not find credit. Lack of buyers causes motivated sellers to drop prices in order to get out of their properties. Lower end properties will probably be affected more than luxury properties.

3) Devaluation; meaning the purchasing power of your currency deflates relative to world currencies.  People find foreign goods are more expensive (including petroleum products and energy) and have little money left over for discretionary spending. This can cause people to trade down in their housing in order to balance their household budget. This scenario gets strange, as foreign direct investment can cause some markets to actually rise in value while markets driven by local purchasers see their valuations drop.

Hersh M. · Answer

Thanks @Frank R. . I like your optimism on 'suffering less'. :)

Franklin Romine · Answer

@Hersh M.

Those thoughts never crossed my mind when I started investing in real estate and I still don't understand deflation.

My thinking is real estate is one of the only tangible, income producing assets that I can get a insurance policy on.

Get into a deal that pencils out to cashflow or to resale.  I look at worst case scenarios.  If the market completely disintegrated from deflation, inflation, flu, war, drought.... we will be the small players suffering much less than everyone else.

Frank

Hersh M. · Answer

Thanks @J Scott Hamilton

Hersh M. · Answer

One last try. I wont ping after this. :)

Hersh M. · Answer

Probably a tough question. Ping.