WHAT CAN YOU DO ABOUT INFLATION TO PROTECT YOUR WEALTH?
In the course of speaking with numerous Real Estate investors, the number one issue keeping them up at night is INFLATION. How will inflation impact your existing asset(s) or future investment returns?
- Will inflation push interest rates higher? If so, how will this affect the future capitalization rates (Future Sales Price) and potential refinances or new mortgages?
- Will rent growth keep pace with Inflation?
- Is my cash flow providing me a positive REAL return when accounting for INFLATION?
- Which investments are a good hedge in a higher inflationary climate?
Ultimately, investors are thinking “Where can I put my money?” to get the best inflation adjusted returns with some level of certainty.
Inflation Is A Hidden Tax
Investors should look at inflation as a “hidden tax” that reduces the purchasing power of your money.
The annual inflation rate in the United States is now running at close to 5.0% from the 12 months ending in May 2021. Therefore, if your money isn’t growing by 5.0% you are losing REAL money on this hidden tax. Will inflation continue to grow or stay relatively high in the future? Truth is, no one knows. HOWEVER, there are clues that help tell us that it is probably here to stay.
Related Resource: How to Utilize Commercial Real Estate for Taxes
The Federal Reserve Bank (FED) pumped $3.38 Trillion new dollars into the banking system, about 18% of the total supply of dollars in existence. That means almost one in every five dollars in circulation today was created in 2020.
In addition, the government forced lockdowns that created supply shock issues and supply chain disruptions, which has manufactured artificial scarcity on food, lumber, parts, cars and even housing construction.
Historical Graph showing Consumer Price Index (CPI) Movement:
Nobel Prize winning economist Milton Friedman famously defined Inflation as this: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” The twin forces of the FED printing presses running full out and the Trillion dollar-plus “Infrastructure Bills” are throwing fuel on the fire.
WHERE DO SAVERS & INVESTORS GO TO COMBAT INFLATION?
What does this mean for you? Well if you have your money in a bank account or low-yielding bond right now, it means you have a negative return on your money.
10 Yr T-Bill
Muni Bond (AAA-A)
*Bond Benchments/yield data from WSJ June 2021
*CD- Goldman Sachs Marcus
*Money Market – VIO
Classic Inflation Hedges
Gold and Real Estate have long been the go-to assets for fighting inflation and preserving wealth. There are also now some newer ways to avoid inflation eroding your assets and wealth.
Gold & Silver
Gold and Silver are not only physical materials but also relatively rare metals that are not prone to corrosion and rust, like iron or relatively abundant copper and aluminum. Gold is especially difficult to mine and has a relatively stable rate of production in which most of the gold mined throughout human existence is still in the total gold supply. It is for these reasons that it is the Gold Standard of money and a good hedge against inflation.
Both Gold and Silver have been used as money for more than 5,000 years. These precious metals should be a part of most investors’ portfolio; experts recommend you hold the physical asset as bars or coins versus a gold ETF, Gold SPDR or gold fund. Our friends at American Gold Exchange are an excellent company that specialize in precious metals (gold, silver, platinum, palladium) and coins for both dealer-to-dealer and direct sales to the public.
Precious metals also have their drawbacks; including volatility of pricing, physical storage and that they are pure stores of value with no cash flow or tax benefits.
60/40 Stocks/Bonds Portfolio
Most investors have heard of the sixty percent (60%) stocks to forty percent (40%) bonds portfolio. It is considered one of the standard strategies for conservative investing.
However, when it comes to inflation, stocks have historically decreased returns due to the theory that a company’s goods or services shrinks because of rising prices. Then you get hit with the double whammy of bond yields being fixed and not keeping up with rising inflation. Lastly, both stocks and bonds are taxed as regular income so, if you are not holding your portfolio in an IRA, the interest and dividend are added on top of your regular wages and dramatically reduce your total returns.
Related Resource: Diversification Is The Only Free Lunch
Treasury Inflation-Protected Securities (T.I.P.S)
To avoid these kinds of problems, a popular option for US investors is to buy treasury inflation-protected securities (known as “TIPS”). These US government issued bonds are tied to the Consumer Price Index (CPI), the value of the TIPS increase when the Consumer Price Index rises. Because the interest paid on TIPS is created from the base value, the amount of interest payments increases with the rise in base value. There are also other available types of inflation-indexed bonds for investing, like ones issued by governments in countries other than the USA.
You invest in TIPS in a few different ways including acquiring the bonds directly through the U.S Treasury or opening up a brokerage account with a stockbroker.
While TIPS are tied to the CPI, most savvy economists and investors understand that the official statistics understate the real rate of inflation. Additionally, these bonds provide small returns that will just barely preserve your cash but will do nothing towards generating additional wealth and better returns.
Bitcoin was designed to be a digital currency and has ended up in its current form more as digital gold, i.e. a store of value. Major institutional players such as Fidelity, Mass Mutual, Ray Dalio, Michael Saylor and Paul Tudor Jones have already discovered the wealth behind this inflation-hedged investment.
Just like mining for precious metals, Bitcoin is “mined” by a process known as “proof of work,” which uses energy and computational resources to solve a math problem. Miners compete to solve the problem and the winner is rewarded with one bitcoin and issues a block to the blockchain.
Related Resource: Should You Collect Your Rent In Crypto?
One major benefit of Bitcoin is that is has a hard cap of 21 Million coins that will ever be mined. With a fixed supply of coins, Bitcoin was designed to be Deflationary. Bitcoin should have a built-in hedge against inflation because the value is less likely to be inflated when only a limited number of coins exists. Bitcoin’s protocol for the network consensus of the miners sets the monetary policy. There is no central banker controlling the supply. The supply mechanism (mining capacity) is distributed through the world.
Is Bitcoin a good investment? Well if you would have invested $1.00 in Bitcoin on July 17, 2010 (the Bitcoin inception date was on January 3, 2009), you would now have $729,993.94 for a Total Return of 72,999,294.062% and an Annualized Return of 342.79%.
Should you cash in your chips and go all in to Bitcoin? The answer is probably not. First, while Bitcoin over the past few year has been a truly remarkable invention it is still quite young as an asset compared to real estate and gold. Additionally, Bitcoin and other cryptocurrencies are extremely volatile and have been known to drop by more than 35% in a matter of hours. Also with Bitcoin, there is no tangible asset. If your electricity goes off or you lose your password, you have no access to your crypto.
With those words of caution, many experts do feel, that it is worth allocating about three (3%) to five (5%) percent of your portfolio into Bitcoin.
Note: Liberty Real Estate Fund I LP and Liberty Equity Management LLC (collectively LibertyFund.io) have made every attempt to ensure the accuracy and reliability of the information provided. Liberty cannot not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the information contained herein. The information herein is not considered legally binding legal advice, tax guidance, or financial counsel.
Over the past 500 years, real estate has generally tended to increase in value. Real estate has historically been an excellent hedge against inflation because it appreciates over time and provides long-term growth, which creates an excellent store of value.
Since real estate is a hard asset with physical properties, it has a natural scarcity because there is no ability to create more of it without considerable effort and expenditure.
Related Resource: Why Choose Commercial Real Estate Investing?
Another excellent benefit of real estate is its tax efficiency; the government has incentivized investment in real estate.
We like Real Estate for a number of reasons and in particular Single Tenant Net Lease (STNL) properties for more certainty. Here is why:
- Cash-Flow Income: Corporate Credit STNL properties historically beat inflation and pay higher income (dividends/yields) than bonds & equity dividends.
- Tax-Advantaged Yield: Investors receive cash flow with depreciation and interest deductions, which help reduce their reduce tax rate over other standard equities & bonds (excluding muni bonds which lose money to inflation).
- Triple Net (NNN) Lease Structure: STNL buildings require tenants to pay for increases in taxes, insurance and maintenance.
- Preset Rental Escalations: Built-in annual or every five-year rental escalations.
- Location, Location, Location: The underlining property for a STNL appreciates. Covered land play. Desirable real estate goes up in value, with or without a lease.
- Fixed Debt (Mortgage): Given the Credit of STNL properties, banks provide competitive fixed-rate loans. A low fixed-rate loan is like having FREE money with the Interest rate at 3.5% & Inflation greater than 3.5%.
- Construction Cost: If inflation increases construction cost (FYI, it already has), then it is more desirable to lease instead of build.
- Credit Tenants: strong balance sheets with Corp Credit can pivot and survive in inflationary markets.
- Correlation of Inflation and Rent: Higher consumer goods/services equals higher sales. Higher sales mean higher rents that can be paid.
From a Macro view, check out the relationship between the 10-year Treasury Bill & National Cap Rate movement.
Cap rates and Bonds are Historically Low. As we discussed earlier, Cap Rates affect your future sales value and your cash flow on future mortgages.
Lock in low interest rates on your mortgage, get inflation protected/tax advantaged cash flow and acquire well-located properties with strong credit tenants for more certainty at this point in the cycle to beat inflation.
To learn more about beating inflation with Single Tenant Net Leased properties & Liberty Real Estate Fund please contact us HERE to schedule a call to learn more.
*Note: Liberty Equity Management LLC/Liberty Real Estate Fund I LP (Liberty) have made every attempt to ensure the accuracy and reliability of the information provided. Liberty cannot not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the information contained herein. The information herein considered legally binding legal advice, tax guidance, or financial counsel.
Jason Ricks, CCIM is a Principal and the COO of Liberty Real Estate Fund I LP, the World’s First Net Lease Security Token FundTM, as well as a Concordia Equity Partners principal whose primary focus is on acquisitions, leasing, and development.
Jason is a native Texan, professional real estate investor and certified commercial investment member (CCIM). Jason’s background in retail leasing and asset management make him an invaluable member of Liberty’s team for developing strategies to unlock the value of a property. Jason also has extensive experience and familiarity with south and southwestern US markets. He received his BS in Business Management from Oklahoma State University, where he was a Team Captain for the Oklahoma State Football Team (The Cowboys).
Jason is an active member of the International Shopping Counsel of Centers (ICSC). Most recently, he was featured in the #1 Amazon bestselling book: DESIRE, DISCIPLINE & DETERMINATION (2019). Jason has also been featured as a guest on NPR, the Nothing But Net Show podcast, Simple Passive Cashflow Podcast, and Commercial Real Estate Investing from A-Z podcast.