The following is a guest post from Jim Driscoll, the founder and author of CriticalFinancial.com.
Real estate is made up of an array of commodities each possessing their own intrinsic value; such as wood, concrete, petroleum products, copper, aluminum, and other building materials. The cool thing is they are packaged together into a single investment called real estate, which can be leveraged, depreciated, and purchased with borrowed money.
As if that’s not attractive enough, a fantastic tax benefit pushes real estate into the category of ‘best investment ever’! Is there a greater investment? If there is, I haven’t found it. What other investment allows you to invest potentially 5% or less of your capital, then lets you outsource your interest payments to a tenant.
Ahhh…the utopian investment. Nope, not so fast. Being a landlord is not for everyone. Those middle of the night phone calls to fix a stopped up toilet are enough to weed out a large swath of investors.
Real estate is not liquid. Many investors want to be able to rid themselves of their investment as soon as they think it looks to be hitting a downturn. For some folks though, ‘being liquid’ only creates temptation, and we know what temptation can cause us to do in the highly intense investment game.
After my experiences of losing money through investing in Wall Street products, I have now trained my mind to think of real estate as a forced savings account.
Real Estate = A Friend to Inflation
Many of us think of inflation as the enemy, and for high end consumer products, it likely is. However, with real estate, and particularly rental properties, it can be the catalyst for making your investment all the more profitable. This is assuming your investment produces rental income and was not purchased wholly for the interest of speculation.
As a cash-flow-conscious landlord, while we wait for the rent checks to hit our mailboxes, the phenomenon of inflation is actually working in our favor. Again, if we broaden our perspective of real estate and look at it as a packaged commodity, then inflation is actually working with us. It is increasing the value of those commodities that make up the investment (those 2×4’s, those copper water lines, the PVC, the land it sits on).
All adjust in price with the market, and over time end up costing more. Also, the cost of labor to reproduce the property increases over time. So, your packaged commodity is heavily influenced by this inflation phenomenon and, along with market demand, will be what elevates real estate values.
Government – Inflation’s Helping Hand
It cannot be overlooked that governmental policies play a huge role in the cost of goods and services. They also play a rather large part on the creation of booms and busts. Quantitative Easing is one example of a policy which is creating a boom. There will be a bust…stand by!
So, as an astute real estate investor who is planning on owning a property for the next 10, 20, 30 years, you must plan for how this will affect your packaged commodity over the long haul. Since a packaged commodity is a ‘Good’, a prudent investor should position themselves to take advantage of governments ‘helping hand of ineptness‘.
The best way to accomplish this is by timing your real estate purchases. Make your purchases just after a deflated bubble which would have been the case in 2009. Then ride the wave of inflation while the cost of materials and labor artificially rise. This will push up replacement costs for properties, which is what is happening right now.
Expect this deflated bubble-to wave of inflation time frame, to last about 7-10 years. By recognizing your real estate is a ‘packaged commodity’ and engaging in this bubble-to wave of inflation strategy of wealth creation, you will be be able to enjoy the real estate game for its fruits and produce real value for you and your family.
Editor’s Note: I love how Jim considers real estate a forced savings account. We would be hard pressed to find a better vehicle that inherently pushes us to consistently save our money month after month.
Editor’s Questions: What’s your take on real estate being a friend to inflation? How do you view your rental property – as a whole unit or the sum of it’s parts? Has your rental real estate purchase been a blessing or a curse?
Author Bio: Jim has always had a passion for investing, saving, and all things finance related. In 2012 he took to the world of blogging as a way to express his views and encourage others to take a broader look at the investing world. Check out his site at CritialFinancial.com.