From: lvs@austin.eds.com (Larry Vansickle)
Newsgroups: misc.invest.real-estate
Subject: Re: Review of "Buy & Hold Real Estate Strategy"
Summary: Profiting from inflation
Keywords: inflation
Date: 27 Sep 92 21:19:35 GMT
Followup-To: misc.invest.real-estate
Organization: EDS Research, Austin, Tx

macrakis@osf.org (Stavros Macrakis) writes: 
> In article <1992Sep23.163530.5611@austin.eds.com> lvs@austin.eds.com (Larry 
> Vansickle) writes:
> 
> *** Book Review *** of The Buy and Hold Real Estate Strategy
> 
> Thanks for the book review.  A few comments.
> 
> [comments on relevance of Schumacher's net worth deleted]
>
>    Appendix A is Schumacher's Real Estate Axioms...:
> 
>    o  Values will increase because a capitalistic economy cannot exist
>       without inflation....
> 
> Who cares?  If the property price rises only with inflation, you're
> not making any money.  Schumacher does claim he can do better, but
> that has nothing to do with inflation being inevitable (which may not
> even be true).  The main thing about inflation is that it makes it
> desirable to be a borrower if real interest rates (corrected for
> inflation) are low.  But long-term interest rates today are not low
> compared to current inflation (what future inflation will be, of
> course, no one knows).

I agree with what I think you mean.  Under the right circumstances 
investors can make money from inflation.

Example 1. You own a property free and clear and it rises only with inflation.
You are not making any money because the inflated price has the same
purchasing power as the price you paid.  You are not losing any money either.

Example 2. You own a property with a mortgage and it rises only with inflation. 
Mortgage terms are interest only for five years and then the principal is due.  
The property does not generate any income.  
You lose money because the interest rate is above the inflation rate.
(Long term interest rates are almost always above the inflation rate.)

Example 3. You own a property with a mortgage and it rises only with inflation. 
Mortgage terms are interest only for five years and then the principal is due.  
The property generates enough income to pay the interest and other expenses.  
Now you *are* making money because all the gain from inflation is yours.
It doesn't matter what real interest rates are if income covers expenses.
Essentially inflation is giving you a larger percentage ownership of the 
property even though the property's value, in constant dollars, is not changing.

In general, if the property is generating enough income to cover interest and 
expenses, and there is a mortgage on the property, then the investor is 
profiting from inflation.

I welcome responses, but let me say first:
1. To really do this analysis right, I should have analyzed alternative
   investments and compared outcomes, taken account of the interest that could
   have been earned on the down payment, etc., etc.  Maybe I'll do so later.
2. There have been deflationary periods in the world's and this country's 
   history.  We may be in one now.  Inflation is not inevitable.
3. Don't depend on inflation to make money in real estate.  Instead, look for 
   bargains and create value by improving property and operations.
4. Don't depend on inflation to bail you out of negative cash flow investments.

I do think it pays an investor to thoroughly understand inflation.

Larry Van Sickle        lvs@austin.eds.com           Austin, Texas