Maybe this is a good time to get back into real estate...

[KenD]

To my esteemed forum participants,

In a never-ending attempt to outdo each other in presenting "The Sky Is Falling" scenarios, I would like to present you with the following, in an attempt to spur discussion.

How Hyperinflation Will Happen
Hyperinflation, Part II: What It Will Look Like

For the sake of argument, let's stipulate that we will accept that the world is coming to an end and that 1980's Brazilian-style hyperinflation is a foregone conclusion. More so, we will also willingly accept that this will happen in the next several months - again, so as to set the parameters for this flight of fantasy.

So, the question before the house is, why wouldn't this be a great time to take on as much debt as possible, specifically in carefully purchased real estate, with the aim of having to pay back these loans with significantly reduced valued dollars?

One more caveat, let me also couch the above question in terms of purchasing real estate which can easily be rented to nothing short of excellent quality tenants, people who will continue being able to meet their rental obligations, as well as doing so at a more than acceptable cash flow levels.

I know would like to invite this community to "have at it" and look forward to everyone's opinions.

[jpatter666]

Re: Maybe this is a good time to get back into real estate...

http://patrick.net

[c1ue]

Re: Maybe this is a good time to get back into real estate...

Exhibit 1: Weimar household spending

WeimarHouseholdExpenditures1912_1923.jpg

Notice how rents became pretty much zero. This also applies to any equity in your home.

Point 2: Consider household income in the US

Is it going up? down? That tells you right there how likely real estate prices are to go up or down.

As to your specific scenario: your assumption is that hyperinflation will erase your debt. But what about your assets? Will they also keep up or similarly be erased?

What will the house price be after said hyperinflation is done? The real estate taxes?

How can you be sure that your high quality tenants won't lose their jobs? Move somewhere else for employment/education/security reasons?

In certain cases - like jk has done - where he's fully levered up the house he lives in with the implicit assumption of not going anywhere, the risk for him is minimal as he has the cash to pay off the mortgage as well as no counterparty risk.

But getting rentals isn't the same.

[don]

Re: Maybe this is a good time to get back into real estate...

Exhibit 1: Weimar household spending

[ATTACH]3630[/ATTACH]


In certain cases - like jk has done - where he's fully levered up the house he lives in with the implicit assumption of not going anywhere, the risk for him is minimal as he has the cash to pay off the mortgage as well as no counterparty risk.

Great Weimar chart, hadn't seen that one before. Can you give a link to jk's post. I'm sure I read it but would like a 2nd go. Thanks, c1ue

[raja]

Re: Maybe this is a good time to get back into real estate...

Exhibit 1: Weimar household spending

[ATTACH]3630[/ATTACH]

Notice how rents became pretty much zero. This also applies to any equity in your home.

Point 2: Consider household income in the US

Is it going up? down? That tells you right there how likely real estate prices are to go up or down.

As to your specific scenario: your assumption is that hyperinflation will erase your debt. But what about your assets? Will they also keep up or similarly be erased?

What will the house price be after said hyperinflation is done? The real estate taxes?

How can you be sure that your high quality tenants won't lose their jobs? Move somewhere else for employment/education/security reasons?

In certain cases - like jk has done - where he's fully levered up the house he lives in with the implicit assumption of not going anywhere, the risk for him is minimal as he has the cash to pay off the mortgage as well as no counterparty risk.

But getting rentals isn't the same.

This is a complicated issue . . . but some things to think about:

1) In the event of a Zimbabwe-type hyperinflation, it would be better to own any "thing" than to hold currency.

2) Real estate prices in Germany eventually recovered, so if one could buy with cash and wait it out, RE might be a good long-term investment. Rents recovered, and so did equity.

3) All investments have risk, due to inherent risk as well as pernicious government policy (e.g., high gold-profit taxes). So even with RE's risks, it might be an OK choice compared to investments. Diversification is desirable.

4) Expecting to cover mortgage payments with rent is very risky, for the reasons c1ue points out. That risk is largely removed if you've got the cash in reserve to pay off the mortgage.

5) In the event of hyperinflation, if I had RE, I certainly wouldn't sell it for worthless dollars unless I was desperate. So, as inflation progresses, there will be some upward pressure on RE prices. In other words, today's dollar will buy less RE tomorrow, but RE prices will be lower . . . so maybe it's a wash.

I'm assuming I'm probably going to lose money from my retirement nest egg whatever happens -- the goal is to lose as little as possible, and spread the risk through diversification. At least with RE, I'll own something real that generates income now and will likely do so in the future, even if there is a period of little or no rent.

I would consider buying RE on leverage it a big gamble, and would feel a lot more comfortable holding the cash to pay off the mortgage. But then I would worry that, if hyperinflation occurred, the government would protect the banks by forcing mortgage payments to be indexed to inflation. Rental RE comprises part of my asset basket . . . but I've already paid it off. Leveraging some to take advantage of the inflation play is tempting . . . .