• Nik Valcic

Why Income-Generating Real Estate Is The Best Hedge Against Inflation


Inflation is a hot topic these days. The products and services you buy are going to cost more can be frightening, especially if you’re locked into an income that doesn’t keep pace with inflation. Paying more for toothpaste may be the least of your worries, as retirement accounts take the biggest hit when the value of the dollar decreases.


If you’re concerned about what inflation can do to your retirement dollars, it may be time to consider inflation-hedging investments. Unlike stocks, bonds and mutual funds, investing in real estate can make inflation actually work for you, increasing your income as inflation rises.


While real estate investing is a proven wealth-building tool, most busy professionals don’t have time to be DIY landlords dealing with Airbnb, check-ins and outs cleaning etc. However, it most of the rental management agencies in the PV area do a great job of handling all of these issues for you, AND you can decide how little or much you want to be involved. For example, some owners want to be involved in running the Airbnb platform, speaking with guests, adjusting the prices etc- others would prefer to not. It's your choice.


What Is Inflation?

Inflation is a decrease in the purchasing power of a dollar. What a dollar could buy in 1950 now takes $10 to purchase today. Inflation is caused by a number of overlapping factors. For example, during the Covid-19 pandemic, we saw inflation raise the price of goods and services as supply chain issues negatively affected production and delivery. But global pandemics aren’t the only things that cause inflation. Supply and demand, fiscal policy, corporate policy and manufacturing costs can all lead to inflation.


Inflation Can Diminish The Purchasing Power Of Retirement Accounts

Where inflation is truly dangerous to the average person is in retirement savings. It can be the slow silent drain that reduces the purchasing power of retirement dollars.


While the Federal Reserve believes that a 2% inflation rate is an indicator of a healthy economy, at the time of writing this, June 2022, inflation had risen to 8.6%. Say that many years ago you placed funds into your 401(k) or IRA and allocated it to stocks. From 1999 to 2019, returns of the S&P 500 averaged 5.9%. This means that today, due to inflation, you would barely break even and should expect a loss after paying taxes. In addition, in years past, inflation in the US has risen to levels above 20%. The higher the rate of inflation, the more purchasing power you lose over time, even as the dollars in your accounts increase.


People who plan to fund their retirement with IRAs, 401(k) plans and savings accounts can be devastated by the long-term effects of inflation. One way to hedge against this is to invest in real estate.


Income-Producing Properties Can Make Inflation Work For You


One thing that generally keeps pace with inflation, and even surpasses it, is rental income from investment property. In fact, in our current post-covid environment, rents AND occupancy rates in all the PV areas have increased significantly the past year.


Income-producing real estate tends to have higher rental income than expenses. As an example, a recent Youtube video my colleague Gary Shirk describes in detail how he is netting 60% of his income after all the expenses in a situation where he is completely hands-off. You could certainly increase your net with more involvement. When inflation grows, a smaller expense bill is often outpaced by the leap in income caused by growing rental income. Oftentimes, this effect can drive greater cash flow and profits in an inflationary environment.


Protecting Yourself Against Inflation Is A Smart Move For Your Future

When it comes to investing for your future, considering the effects of inflation on your assets can help you mitigate inflation before it drains the purchasing power in your retirement accounts. By investing in income-generating real estate, you can hedge your bets against inflation and protect your retirement dollars long-term. The beauty of investing in real estate in Puerto Vallarta is that in addition to a hedge against inflation, you are also purchasing a tropical home that you and your family can use when not rented and that you can live in when you retire.


What about a mortgage? Your Mortgage Costs Less Over Time!

Recently, several mortgage options have become available in Mexico. When you buy a property with a fixed-interest mortgage, your monthly payment is based on the value of the dollar at the time of purchase. As you make payments over the years, you’re paying with cheaper dollars as inflation rises.

For example, if your mortgage payment is $1,000, those dollars will buy 200 loaves of bread today. In 20 years, your payment will still be $1,000, but that may only buy 50 loaves of bread. During those 20 years, your wages continue to rise, so that $1,000 payment feels like less of a financial burden. The more inflated the dollar, the easier it is to make your mortgage payments in the future and the harder it is to pay rent. Talk to RJ at MOXI Mortgage for more details on how they can make a mortgage program work for your Mexico purchase.


The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.


 

Interested in moving to Puerto Vallarta, Mexico? Let us show you how easy it is to own and invest in real estate in Mexico. Contact us. Selling your home? Click here to find out how much your home is worth. You can contact



www.YourPVRealtors.com

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