It would seem the inflation genie is out of the bottle. Try as the RBA might, with back to back 50 basis point rate hikes, inflation continues to gather steam.
The rising cost of living is making it harder to borrow to get into the property market, but if you are able to make that happen, you can jump on board and ride the inflation wave to future success. If you stay on the sidelines however, someone else will be the one to benefit from you paying more for every aspect of your life.
In an inflationary environment, property stacks up well as an asset against other alternatives. Not only does real estate have a physical, inherent value; but it also draws an income that actually benefits from inflation. And with a history of steady growth over the long term and through multiple market cycles, property is the ultimate no brainer, as long as it’s done right.
Matter of interest
Have you ever wondered why most investors pay interest only on their investment loans? At least for the first few years? Well, when you invest in a property today, you get a debt that must be paid down over time. But if you pay interest only until the time when inflation makes your debt seem irrelevant, you are essentially paying down today’s debt with tomorrow’s dollars.
If you had bought a house for $100,000 in 1992 and only ever paid the interest on the loan, you would still owe the full $100,000 today. But that doesn’t seem like a lot of money compared to what it did 30 years ago. You could pay it down with a single year’s salary or a couple of years’ worth of rent. The debt you purchased in 1992 can easily be paid off with today’s money.
Cash loses more value every day
As inflation soars, the cost of groceries, fuel, bills and all sorts of things keep going up and up. Every day your actual cash money is worth less than the day before. As b Invested founder Nathan Birch often says, money never buys you more than what it does on the day you earn it. But unlike money, assets appreciate in value over time. Yes, there are peaks and troughs, but over multiple cycles, property becomes worth more and more as the money owed on it becomes worth less and less.
Get your assets and hold on tight
The best way to navigate inflation and thrive is to take as many quality assets like property as you can through this current time and hold on. Eventually you will be left with an inflated income to easily get rid of your existing debt. Someone who was earning $50,000 a year five years ago may be earning $500,000 a year for the same job in the not too distant future. But they may also be paying $100 for a Big Mac meal. It is all relative and it will still be a struggle if they are paying off a large mortgage while spending so much elsewhere.
But let’s just say they have a number of investment properties, for which they owe $200,000 or $300,000 each. These can be paid down pretty quickly in the world of $500,000 salaries, not just by the investor, but by their tenants paying hyper-inflated rent for the properties. Just look at what this year’s inflation has done to rents already. Data shows they have risen 20% plus in the last 12 months.
Easier than in the past, even with rate rises
You can not only pay today’s debt off with tomorrow’s money if the above scenarios come to pass, but you can do it much easier than someone who bought back in the 1990s. Sure, they bought cheap back then, but they paid up to 20% in interest at times on their properties, which made it extremely difficult just to service their loans.
Interest rates are on an upwards charge at the moment, but are still very low compared to the bad old days. They can still be inflated away over time and paid off with tomorrow’s money.