The impact of high inflation on long term note investment

[Charley Gates]

Hello.  This is my first post on BP!

I am new to the note investing world. To date, I have done traditional ‘buy and hold’ rental property investments. I currently own no notes, but I am interested.

I have a question about high inflation.

In the world of ‘buy and hold’, it is advantageous to use leverage and to carry debt from the bank (assuming a cash flow positive investment). This is even especially true in a high inflation environment. Inflation is helping to erode the debt.

In the world of note investment, does high inflation impair the real return on investment (compared to the nominal return) for the long-term note investor?

Thank you for your thoughts.  Best regards.

Charley

[Chris Seveney]

@Charley Gates

Inflation has an impact on any yield type of offering, but what is also not mentioned is that in inflationary periods real estate values typically increase. If you hold a note on a home and the property value increased and you issued the note with above market interest rate it has two effects

1. The increase in the property value significantly reduces your risk.

2. There is a greater chance borrower may refinance to get some of that equity out at a lower interest rate.