According to CBC inflation rate spikes to the highest level in a decade, at 3.7%, and $716 K is the average house price in Canada, and house prices are still soaring.
Inflation is corrosive and can erode the present value of all your assets. Don’t get me wrong, like everything else there are pro and cons of inflation but how fast the prices changes make all the difference. Moderate inflation results in economic growth. If inflation is too high, it can lead to lower economic growth and create instability. The average Canadian family will spend $695 more on groceries in 2021, according to an annual food price report, the highest increase researchers have seen to date. The only way to battle inflation is to make more money
I think it will be naïve of us to think inflation is only 4%. Look around and see what you could buy early this year and how much you have to pay for the same now. Is that only me or do you also feel paying more than 4% for everything?
The government relies on Consumer Price Index (CPI) to measure inflation. It is important to correctly measure the rate of inflation as it negatively decreases the purchasing power of consumers. And, if you want to know the real rate of inflation, don’t bother with the CPI. Moreover, the government wants to keep inflation statics as low as possible reason being all government and public programs; social assistance, pensions, military and federal retires, children programs use inflation as a benchmark to set up policies.
My point is not to propose the correct method of measuring inflation as there is none exists.
But the more crucial question becomes, how can you fight and even make a profit from inflation?
And, the answer is; Real estate
With real-estate investments, you not only kept up with inflation but also gain appreciation you’re your investment.
APPRECIATING VALUE:
Appreciation is one of the most beneficial aspects of real estate investments. In real estate, if you put 20% down to purchase a property, you get a return not only on that 20% but also the other 80% due to appreciation. Let’s say you put 20% down ($100,000) on a $500,000 investment property and appreciation stays at 5% for that year. Your property would be worth $525,000 at the end of year one. You have just made 25% on your initial investment. Not only did you beat the inflation but also made money with real estate investments at 5% appreciation.
According to RBC Economics; Home prices are still rising—the composite MLS Home Price Index in August was up a whopping 21.3% from a year ago
As you can see, you’ve not only kept up with inflation through real estate investments, but you’ve added value and gained appreciation with the investment.
INCREASING INCOME:
The brilliant aspect of owning rental real estate investments is the cash flow generated from tenants. If you run your rental property like a business the income from the rent will not only cover the monthly expenses, including your mortgage, interest, taxes, and insurance (PITI), but will also generate positive cash flow. And if you keep up rent with Market rental rates using effective asset management, you can generate even more cash flow
I agree that some of those expenses such as taxes, insurance, and maintenance cost can rise due to inflation. Canadian rental Prices continue to climb and increased rental income with help to cover those expenses and create additional cash flow if the asset is managed wisely.
DEPRECIATING DEBT:
Inflation works for you when it comes to your mortgage payment. Just as your real estate asset is appreciating in value, your mortgage on the property is actually depreciating in value with the rate of inflation e.g. a $1000 mortgage payment in year one is worth $1000. However, in 5 years, with inflation, that debt is going to be worth far less. Of course, your monthly payment is the same. You will still be making that $1000 payment per month year after year (assuming an amortized loan). But, the value of that payment will be less as time goes on.
When you use financing for real estate interment, you get to take advantage of depreciating debt. One of the best ways to fight inflation, and even win that game against it, is through inflation hedge investments like buy-and-hold real estate investments.
While the presence of COVID-19, the government has increased the money supply. So, what is the downside? We will all pay the price in the form of massive and sustained inflation and it is a good idea to have your hedging position ready for the inflationary market by investing in rental real estate investments.
So what is your strategy to protect your hard-earned money from inflation and why?
Harry Samby
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