For about two years now I have been recommending real estate as an investment. I particularly like rental property. Why rental property? First of all, because it creates cash flow, and if you have to sit on it for a while and wait for the market to come back, you can because someone else is paying the note. Second, and most of all, because of what I see coming in the not so distant future.
In the late 1970s and into the early 1980s the fed raised interest rates dramatically to combat inflation. Inflation can be caused by an extended period of time with abnormally low interest rates. Currently interest rates have been at historic low levels for about four years, and Federal Reserve Chairman, Ben Bernanke says we should expect rates to remain very low through 2014. With QE1, QE2, “Operation Twist,” and potentially a form of QE3 (with a different name of course) around the corner, it would not be surprising to see inflation rear its ugly head in the near future.
A simple way to define inflation is: your money is worth less than it used to be. The only reason the US Dollar has not fallen apart is because the Eurozone is in such bad shape. Once the Euro crisis is over, I expect the dollar to start declining in value again. At some point I believe the fed is going to be forced, like in the late 1970s – early 1980s, to aggressively raise rates. This means the cost of borrowing money will become much more expensive. Lending standards have already become much tighter, but once rates jump it will really narrow the playing field. Mortgage rates will go up significantly, and it will be harder for people to buy a home. When people find it difficult to buy a home, what do they do? They rent!
When this happens, those who own rental property will be in a very nice position. When the demand for property to rent goes up, so will rent prices. It is simple supply and demand. When there is high demand and low supply, prices go up. Those who bought or refinanced properties with the record low rates we have right now will be able to increase their rent prices, and dramatically increase cash flow once this occurs. Another option would be to sell some of the properties and do an owner-financed sale. Let’s say rates go to ten percent, and your property is financed at four percent. You could ask for a significant down payment and then charge the buyer eight or nine percent. The buyer would be getting a great deal because they are getting financing a hundred basis points cheaper than the best mortgage rates, and you get a great deal because you are collecting twice as much as you are paying.
Opportunities come around all the time. So often just we hear talk about the ones that we could have, should have, or would have acted on. The ones who take action are the ones who reap the rewards. This is certainly one of the best times in history to be acquiring rental property. Will you be one who could have, should have, would have, but…? Or will you be someone who did and reaps the rewards?
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