- Ryan O.
Hedge Your Bet
Like owning stocks or contributing to your retirement, owning real estate is an investment. What makes real estate unique is that it's a hedge against inflation.
It's important to understand how we purchase real estate. You can pay in cash, but most buyers, especially first time homeowners, will "lever up." For example, let's say you want to purchase a $500,000 condo. You can put down 10% of the purchase price and get a loan for the difference.
When you get a mortgage, your loan payments are fixed. Assuming you don't refinance, your first payment will be the same as the last payment. The only difference is your initial payments go more towards interest first.
Due to inflation, the value of the dollar weakens over time. What your dollar could buy ten years ago is different on what it can buy today. When you pay your mortgage, you're paying it back with 90 cent dollars, 80 cents dollars, 70 cent dollars as time moves forward. It's important to remember that inflation affects buying power.
Now, let's say you moved out of our first home and turned it into a rental property. The person who is not immune to inflation is your tenant. Over time, as if often documented, rents go up. Your mortgage payments are fixed and your tenant's rent keeps increasing. Over time, what you pay (fixed) and what you collet (rent) gets wider and wider.
Due to COVID-19, our financial markets have been volatile. Mortgage rates have dipped in the 3% range. Money is cheap and there's less competition to buy since people are hunkered down at home. A possible path to long term wealth is to take advantage of our current situation.
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