3 Ways Inflation Can Work to Your Advantage, and What to Watch Out For
It’s not every day that inflation is used in a positive light, and nor should it be. Inflation is an unavoidable and ongoing challenge that this country will be facing for the next four to eight years. No matter what side of the political aisle you stand on, our country and our leadership have chosen to print money to help get the masses out of the nightmare that was 2020. Whether you find that statement infuriating or view it as a necessary evil, that is the reality of our situation. However, what if we took the concept of inflation and considered how we as investors might use it to our advantage?
One threat of inflation is rising property prices. Although this may hinder cash flow opportunities, all savvy investors understand that cash flow is only one of three ways to make money owning property. How can we use that to our advantage? When purchasing a property with a 30-year fixed-rate mortgage, expenses are being locked in at that time. Thanks to inflation, that property that you bought for $500,000, in two years may be worth $700,000. Sure, the value of the dollar might have gone down, but you now have $200,000 to use in a HELOC or a cash-out refinance to buy another property. If you can look past the lower cash flow opportunity for the next purchase, this pattern can easily repeat itself. Plus, once you hold a property long enough, and manage it correctly, it WILL cash flow and it WILL make you money.
Next, it is always important to understand the value of collecting high rent rates. Let’s say a property is cash flowing zero dollars, but this particular 4-plex is generating $4,000 of income each month. Even though you are breaking even now, when you are ready to own that property free and clear, you will be depositing $4,000 direct into your bank account month after month. Higher rents are a direct result of inflation. This could mean it is possible to reach that income-producing goal quicker than originally anticipated.
Lastly, the only way to keep up with rising prices on housing and other goods is to make sure your salary is keeping up. Wage inflation is rising between 4-6%. Some economists are saying that is an indication of the longevity of inflation. However, others are saying companies are being forced to pay their employees more to get them back to work. Whichever projection is accurate, the ability to increase our income also means the ability to qualify for a larger loan. If more money is coming in the door, paying off that investment or using the equity to further your portfolio becomes easier.
In closing, inflation is on the rise. Instead of allowing it to instill fear, let’s get creative and see how we can use it to our advantage. Lock in expenses as quickly and as often as possible. Everything is cyclical and we will soon recover from the current challenge. Staying consistent in investing is key.