It is well known that income producing real estate is one of the best investments you can make. What is less well known is that income producing real estate allows you to get paid to borrow money. At least that’s been the case historically.
The reason for this has to do with the reality of inflation. In times of inflation, your best protection against the declining value of the dollar is high quality, long-term, investment-grade, fixed-rate debt attached to a piece of income producing property. In a nutshell, the right kind of debt is good.
Here’s how it works:
Assume that you purchased a property back in 1979 and that a dollar was actually worth a full dollar ($1.00). Then, thirty years later you find that same dollar worth only $0.24 because of continued inflation (driven by the government’s absurd economic policy).
Although the overall purchasing power of the dollar has decreased over those thirty years due to inflation, the principal balance on your long-term debt is never adjusted in step with that inflation. By paying down your fixed-rate debt with continually CHEAPER DOLLARS than those you originally borrowed with, you are effectively saving yourself a lot of money each and every year.
Now, think about it another way:
Assume you purchased $1 million worth of income producing property with a combined mortgage balance of $800,000. And let’s assume that over the course of one year you didn’t pay down any principal and there was a 4 percent rate of inflation. Your loan of $800,000 would now be worth only $768,000 in terms of real dollars. That’s a reduction of $32,000 in one year!
In the past 36 months Real Estate has seen a decrease in its average mean value, depending on your metro area, an average of 12 to 32 percent. This is referred to as deflation (in economics, deflation is a decrease in the general price level of goods and services). Deflation is not necessarily bad for everyone, especially for new market buyers that need a more affordable housing price in order to purchase.
