Property Management, Tenant Selection, Real Estate News & Tips

Is Being Highly Leveraged In Real Estate a Risky Move In This Economy?

By on June 19, 2014 in Education with 0 Comments

leveragejpgGiven the unknown future of the economy I participate in a lot of conversations about how to best position ourselves for 1. a slowly recovering economy (our current trajectory) or 2. an economic collapse.  When it comes to being a property investor it begs the question, Is it best to have our properties paid off, or should we have them mortgaged to the hilt?

The answer really depends on what is going to happen with the US Dollar.  If you take a look at the last few years, obviously the USD has not fared well.  The USD isn’t really money and hasn’t been since we went off the gold standard in the early 1970’s, it’s currency backed by nothing.  The same goes for the world currency.  History has proven over and over that fiat currency has a 100% failure rate.  It typically fails in the form of moderate inflation, followed by hyper-inflation, until the currency is completely worthless.

In Zimbabwe for instance their fiat currency inflated over 200 million percent.  Can you imagine it costing trillions of dollars to buy a loaf of bread?  This example has repeated itself with many countries throughout history who adopted a fiat currency.  This has been the fate of every fiat currency in the world, and I’m not sure the USD will be an exception. Let’s say history, as it often does, repeats itself and the USD inflates at an extraordinary rate, will it be best to have all your debts paid off or be as far in debt as the lenders will allow?

I’m open to AR members ideas and opinions on this subject.  My own opinion is that it’s going to be best to be leveraged. If moderate inflation continues, as each year passes you literally owe less on your properties.  A $200,000 loan today will be like a $100,000 loan in 5 years if inflation presses on.  If (or when) the USD goes into hyperinflation, a $200,000 loan will cost a mere couple cents to pay off in the future.  I also favor leveraging your $ because you can build wealth much faster by using other peoples money rather than waiting until you manage to save enough to purchase an investment.

However, what if the USD started deflating?  The exact opposite would happen.  It would be much harder to pay off a loan because we would be earning less.  Rents would go down along with other commodities.  This would be very bad, and I would think that the best place to be in this situation is in a debt free position with properties.

So how likely is deflation to occur?  There might be momentary blips; however, the entire arc of power in DC and Wall Street do not want deflation to occur.  It’s bad for government and it’s bad for banks.  Since the government and the banks have complete control over money supply, and therefore complete control over inflation/deflation it seems unlikely.

Inflation on the other hand seems extremely likely.  Each dollar the Fed prints, and each new loan creates more fiat currency.  Every dollar printed, slightly devalues all existing dollars.  Since the government is running a huge deficit (the largest in history) now in the trillions, they have to print money faster than they are spending it to remain in business.  So they are creating money faster than ever  and inflation will adjust to compensate with some of the highest inflation we’ve ever seen in the USD.

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About the Author

About the Author: Dulcey is both a private landlord and media contributor for Rentec Direct. Her passion is to bring up to date, useful information front-and-center for property managers and landlords. .

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