Merri and I have rental units in four places to fight inflation. This unit is a loft with wonderful views.
Inflation is heating up globally and there are serious debt and economic problems everywhere. Extra Export Earnings can help overcome this risk. This message looks at another form of exporting: low cost rentals.
Hopefully inflation will not get anywhere as bad as after WWI, but a look at inflation at its worst can help us see ways to invest and do business in times of more modest price increases.
Germany borrowed heavily to pay WWI costs. Heavy borrowing almost always leads to inflation and this did then. In the USA and UK too. Right after the war there was some stability, before inflation began to run wild. By 1923, it reached the worst in history. Prices sometimes doubled in hours. By late 1923 it took 200 billion marks to buy a loaf of bread.
Hard-working people with modest spending habits could not even buy a postage stamp with their life savings. All debt was wiped put but so too were all savings.
Businessmen quit and speculated in stocks and goods instead. Small businesses survives holding material things such as : clothing food, anything people could consume. Salaries were paid three times a day yet shops were empty. Food riots raged. Businesses closed down, unemployment soared. The economy collapsed.
Anyone on a fixed income was destitute. They sold everything just to buy food.
One of our mountain creek rentals in North Carolina.
Now comes the question, what happened to rents?
A good book to read about this is entitled “Exchange, Prices, and Production in Hyper-Inflation: Germany, 1920-1923” by Graham, Frank D. Here is an excerpt from Google.books:
Tenants were protected from eviction so long as they paid rentals officially determined on the basis of prewar charges. The amount collectible was occasionally raised as inflation proceeded but the increases always lagged far behind the existing depreciation of the currency and were quickly rendered nugatory by the further loss of value of the monetary unit. At all times after 1920 rentals were more or less nominal, and, in the period of hyper-inflation housing was obtained practically f ree of charge. Except for a possible reversion when financial order should be restored, the property of the landlords was to all intents and purposes confiscated. The regulation of rentals had wide repercussions. It reduced the cost of living and diminished the pressure for wage advances to compensate for the rise in commodity prices. It was thus a factor in keeping those prices below what they would otherwise have been and in widening the differential between the domestic price structure and that of the outside world.
In other words during inflation expect this message from governments to landlords… “Screw you!”
A reader sent me a note regarding this saying: Very good analysis of why hyperinflation is on the horizon. Well worth the read. I’m not sure about this part: “Considering that we just came out of the largest Real Estate bubble in world history, there is a glut of homes available to rent on the market. NIA has been saying for years that being a landlord will be the worst business to be in during hyperinflation, because it will be impossible for landlords to increase rents at the same rate as overall price inflation. Food and energy prices will always increase at a much faster rate than rents.
“If you have rental homes with fixed rate mortgages/PITI of, say $600/mo., and your tenants are responsible for paying their own gas and electric, and you’re renting the houses at $800+/mo, then to my mind it won’t matter that you can’t ‘increase rents at the same rate as overall price inflation’. As long as you can continue to rent for more than the PITI (principal, interest, taxes and insurance) then you’re okay. And if overall prices are going up, up, up, so will rents, though they may lag.
“Some will say that the real threat to the real estate rental market is government-mandated rent controls. And of course, that’s true. But you can say that about anything. The real threat to the food commodities market is government-mandated food price controls. The real threat to the gold market is government-mandated gold price controls. The real threat to the stock market is government-mandated stock price controls (or mandated market closures during which you can’t buy or sell). The real threat to the energy market is government-mandated oil price controls. In short, the government can mandate whatever price they want for anything. So that can’t be your primary reason against investing in something, to my mind. There will be the government price, and the black (free) market price. S.B., NV
Our Central Florida
rental. Outside and…
This process of renovation fills part of Merri’s and my creative desires as it…
creates income and inflation fighting potential… if… inflation does not run too wild.
Those of you who have read this site for awhile know I like and have plenty of fixer uppers to rent.
I agree with the ideas above but always like to own rentals without mortgages or debt. They will then more likely to be a dependable store of value.
I am actively looking for more in the Mt. Dora area now. However the note above is correct… if inflation becomes serious, the profit will come from capital appreciation after stabilization… not rental income during the inflationary sprint.
This is why my portfolio also has rental fixer uppers in Ecuador as well as the USA. As strong inflation grows in some parts of the world, there are always other parts where more people will move (Ecuador for instance) and this will increase the rental demand there.
Inflation is with us. About this there is little we can do. We can arrange our affairs to be protected and prosperous during inflation. Real estate is a good hedge against inflation. Rental fixer uppers even better and best of all real estate in two or three different places.
Our Ecuador beach rental.
Our rental casita in the Prima Vera I complex.
Learn more on how to develop Extra Export Earnings at our International Business and Investing Seminar in West Jefferson, North Carolina June 24 to June 26, 2011.