Comments on: Is Real Estate a Good Hedge Against Hyperinflation?

By: Hadsrubal

Hadsrubal — Thu, 19 Jan 2012 01:59:33 +0000

The author of this blog is ill-informed. Real estate is a far better hedge than gold for several reasons, especially in this current environment

1) Intrinsic Value: people need places to live in, thus real estate has excellent intrinsic value. Gold, on the other hand, has no real value except for being a traditional medium of exchange, primarily due to it’s aesthetic appeal, rarity, and divisibility. Can you eat gold? No. Can you live in gold? Not really. Does gold have industrial purposes? Yes, but they’re fairly limited.

2) Housing prices are down; gold prices are up. Now is the perfect time to buy real estate because prices are low! Sure, they may go lower, but they can’t go much lower from here. Gold prices, on the other hand, are very high. Sure, the price of gold may go up even more, but at these levels it’s far more risky to own than real estate (what if, by some miracle, a hyper-inflationary scenario doesn’t play out? people will still need homes to live in, yet gold will undergo a fire-sale)

3) You can get a low interest rate fixed mortgage. That’s right, if a hyper inflationary scenario were to occur, your returns would be leveraged because your house would be bought with borrowed money…borrowed at a very, very low interest rate (for those who don’t know, rates will increase considerably if inflation unfolds). Say for instance you buy $200,000 home with a $50,000 down payment and a $150,000 30 year fixed mortgage. If the dollar loses it’s value by half, your home value would double to $400,000; however, you would still only owe $150,000; that means your home equity is over $250,000 now! Your initial down payment of 50k would experience a 500% percent return!

And the best part is that say if such a scenario doesn’t happen, you still bought a house in a buyers’ market when rates are low! The downside risk is limited while the upside is similar to buying gold. Did I mention you can live in your house (unlike gold) and you wouldn’t be paying rent, but a mortgage instead (adding to your home equity)

For those with large sums of wealth, considering gold may be an option, but for the average person, owning a home is a good deal if you can afford it!

By: mkoz

mkoz — Fri, 07 Oct 2011 18:22:11 +0000

Cali James – I agree food would go up a lot, but I think rents would go up to. Demand for rental properties will increase since people will not be able to afford to pay their mortgages in a hyperinflation scenario. Remember, salaries will drag behind the real cost of goods. This will force those who can barely afford their mortgage now, to seek a rental.

By: teejayceo

teejayceo — Fri, 23 Sep 2011 07:03:42 +0000

It’s real simple…there is a finite amount of land. The population is growing…and however you want to believe the earth is warming so the amount of land available is shrinking. Supply and demand. Do the math(s.)

By: james (CA)

james (CA) — Mon, 18 Jul 2011 07:10:55 +0000

Rents would come down but food would go up a lot. I have learnt 2 gurus recommend buy and flip not buy and hold due to potential of reduced rents and higher tax, maintenance, and insurance during hyperinflation. Please do some more research and let us know.

By: Tskm

Tskm — Mon, 30 May 2011 21:07:52 +0000

For years I have owned some single family dwellings in California and prior to the R.E. bubble popping I borrowed on them and put the money backing into them by upgrading them and the landscape. My thought was that they would provide steady income in my retirement which has now arrived. Values on my properties are roughly 50% what they were, but rents have held firm.

Despite the advice of so many economic forecast authors I just can’t bring myself to selling them. I believe even if their values further decrease during a major economic meltdown, i would still have rental income. That is enough to pay their mortgages (all fixed rate) and supplement my wife’s and my pensions. So, even with rent controls, we would be able to survive the meltdown. The worry I have is whether or not current rental values would be drastically reduced during very hard economic times with hyperinflation.

Anyone know what rents were like in the hyperinflationary Weimer Republic of Germany? I have read that R.E. values were down, but what about rents? Anyone have any thoughts on this?

By: David

David — Thu, 14 Apr 2011 20:54:00 +0000

Gold produces very little income when leased out real estate produces income. Hands down real estate destroys golds. Your not comparing apples to apples. If you leased or borrowed or leveraged gold it would be just as risky as real estate!!! Gold does nothing more then real estate they are both commodities just like corn or sugar or oil they are tangible hard assets. A well picked real estate investment that produces income that you pay cash for totally destroys gold on a ROI type basis over the long haul. I will compare my duplex I paid cash for 30 years ago against your gold you paid 350 an ounce for 30 years ago any day of the week hands down I win. In 30 years your gold went from 350 an ounce to 1500 an ounce. My duplex went from 50k to 170k and thats after the crash in the market. My duplex also produced income after expenses in the range of 700 per month for 30 years the actual rent per apt was about 650 per apt but expenses eat up some so we will say after management fees and taxes and ect 700 per month from the 1100 i get in rents. 700×320 months = I will use 550 for rent amount per apt since rent where lower 30 years ago…
700 bucks x320 months = 224,000 in rents 170k in value= 394,000… Your 350 dollar gold shoots up to 1500 per ounce and now we sit with 50,000 in gold being worth a little more then 225,000 in gold you have.
I wont argue the particulars that gold is in a bull market and may go higher it could be just as real estate is in the trough of a bear market and is in the opposite situation how ever . The astute investor already understand the power of leverage and its destructive qualities as well. So telling the public dont buy real estate because of the risk of borrowing is assuming we need to borrow. Investors have cash they dont always need to borrow just like those that bought gold maybe they paid cash? Remember gold and silver while shiny and iron clad have the distinct problem of not generating income all it is is a way to hold income a safe haven to hold cash that you need to have access to quickly. If you are not in a hurry to liquidate real estate is far better an asset since it produces. How ever if you cannot actively babysit your assets then maybe gold has the edge or silver. These assets have there place and I like gold and silver and I tell people they should have some but the majority of assets need to produce income or its not doing its job. Capital needs to produce. Leasing gold could make your 50k grow a ,little bit but you lose the control over the gold as you give it to a 3rd party that the risk is they dont return it if the market crashes so I cant really give you that when comparing gold to real estate. My well placed duplex appreciated modestly as did the rents and I could liquidate today for 170k in less then 30 days. The recent appraised value is 225k so I figure knock off at least 20% in this bear market. I just bought a few more distressed properties as income producers and I sold off gold and silver that exploded in value leaving too much of my portfolio in what I consider non producing assets. I like gold but I dont need 20% of my assets in gold and silver… So I bought 2 more duplexes that will produce 2k a month after expenses and management. What is left in gold and silver will stay there to protect my cash position in the market place.

By: Bob Neary

Bob Neary — Fri, 25 Mar 2011 00:34:58 +0000

Why do you smarter than I folks always talk as tho houses and rentals are the only Real Estate. Farm land can be purchased and leased to a neighbor farmer. It is easier to eat the product that is produced on farm land and the demand will always be there. You city folk should know where all the Heavyweights are putting their big dollars right now. Check Montana Land and see what has happened in the last few years since Mr. Ted Turner and others have hedged their money there. Just a thought…..

By: QE2 making me uneasy

QE2 making me uneasy — Sun, 13 Mar 2011 23:43:24 +0000

A paid-off house with plenty of energy-saving modifications and a veggie garden/chickens can change to a multi-generational dwelling during hyper-inflation. To me it seems to be the core plan of a hyper-inflation strategy. Just the shared car would make it worth it.

NOBODY should have a large mortgage anymore. Hyperinflation or no, jobs are just too insecure and hard to come by. I would rather the kids be used to living with grandma and their cousins and if we have too much money, then we’ll take more vacations.

By: Ryan Posewitz

Ryan Posewitz — Thu, 06 Jan 2011 18:25:25 +0000

This article is quite innaccurate and incomplete. Actually, while it provides some basic characteristics of what a good hedge may include, the accuracy of its analysis on Real Estate and Gold markets is wrong. First, hard commodities are usually a good hedge, though are still supseptible to global market supply and demand, and if the US enters a period of hyperinflation, consumer markets will suffer and so will the global demands for commodities, but relatively, you can store some value here. In regards to real estate, he is absolutely wrong in his analysis of utilizing debt during inflationary periods. Actually, fixed debt is awesome! If i have a fixed mortgage on a piece of property, as inflation occurs i am paying the mortgage company a fixed obligation. Our labor is a factor of production, it increases in cost to the producers, same as commodity costs. So as an example, say a loaf of bread goes up from $1 to $10. Why, because the dollars value has decreased by 90% and in real terms. So it takes you $10 inflated dollars to buy a loaf of bread, and the producer has to pay inflated costs of inputs (grain, yeast, labor (you), etc). In regards to the fixed mortgage, you are paying this back on a fixed basis, your $200,000 mortgage real value is now only $20,000 or 1/10th. In real terms, the bank is in trouble, and the debtor is golden. So holding debt which is not adjusted for inflation is a great thing and is used by investors to make lots of money during times of inflation. There are many other attributes to owning quality real estate during times of inflation, i urge people to look beyond this article and do some research.

By: Todd

Todd — Mon, 27 Dec 2010 14:18:11 +0000

Just a mention – I have about 20 apartments in 2 buildings worth about $1.3 million. While that seems like a lot of money it’s not nearly as great as it seems. With everything rented out the net income is pretty good but the TIME spent in keeping them up is an important factor. What with upgrades, repairs and maintenance these 2 buildings take up plenty of personal time. If you hire these things out you can easily go into the red each month.

I am hoping there are a good income source / inflation hedge but am paying a price in lifestyle.