Inflation - Does It Really Help REI?

[Bryan Hancock]

I am reading a book on hyperinflation and depression right now. This seems to be a popular target with all of the mess going on so I figured I would try to educate myself some more. The author is a renowned REI author. He claims that inflation will not benefit real estate investors using the reasoning that fixed-rate debt's real cost will be offset by increased expectations for inflation that drive up interest rates. Higher interest rates mean lower capital values and thus lower prices for real estate.

This seems logical to me, although I don't know if they will offset each other perfectly. I guess I don't care too much if I don't plan to sell the projects while said inflation is high, but this has caused me to think a lot about how sound it is to hedge inflation with leveraged real estate. I guess it would depend on your goals.

Thoughts?

[Timothy W.]

Depends on what kind of investor you are. I have to imagine it hurts flippers as the price of materials and labor rises with it and real estate may be slow to react. I.E. I can buy a house now for 8-10k that has 40k in materials if I could strip them out and sell them retail (without calculating labor costs).

For the buy/hold investor I can see some advantages to it. If you're sharp enough to have gotten fixed rate financing, rent will increase with inflation while the mortgage stays a fixed currency dollar amount no matter what that currency is "worth". I don't pay anyone's utilities anyway on anything but in a time of hyperinflation I would definitely not pay them.

What the real challenge will be is even if you can still make the investment perform better on paper - will the end dollars to you be enough to sustain your lifestyle?

Inflation benefits the prepared who convert their cash into other commodities and come in after inflation hits and buy the shattered remains of people's lives for pennies.