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INVESTMENT STRATEGY

INFLATION

HowReal Estate Investors Can Benefit from Inflation WHERE AND HOW YOU PLACE YOUR INVESTMENT CAPITAL IS CRITICAL, ESPECIALLY IN AN INFLATIONARY MARKET.

by Aaron Chapman

hat do you think the current rate of inflation is? I start every conversation with W investors with that question. Much too often I hear “2%-3%” in response. A common number in recent years, that number is now quite a distance from the “official” numbers. Let’s take a look at how we mea - sure inflation. PCEAND CPI The Personal Consumption Expen - ditures Price Index (PCE) and the Con - sumer Price Index (CPI) are the two most commonly referred to indexes for inflation. The published data from the Federal Reserve indicates CPI at 6.8% at the time of this writing. Each index is very specific in its measurement and focus. The CPI is a statistical estimate constructed using the prices of a sample of items whose prices are collected periodically. The PCE price index is a narrower measure. It looks at the changing prices of goods and services purchased by U.S. con- sumers. It’s similar to the Bureau of Labor Statistics’ consumer price index for urban consumers. Each of these inflation indices refers to specific items that are measured and tracked, and most items can be controlled by the Federal Reserve’s monetary policy.

However, if you view inflation as a reduction in buying power, other economic indexes, in my opinion, better illustrate the true change in cost of living for the average Amer- ican. They consider a wider array of expenses that impact consumers and factor in how location impacts expenses. For example, the PCE attempts to identify underlying infla - tion trends by excluding two cate- gories—food and energy. However, food and energy are two significant necessities for all consumers. Take a look at John Williams’ www.shadowstats.com and Ed Butowsky’s www.chapwoodindex. com for comprehensive data on inflation. Your eyes will be opened to the “wizard behind the curtain,” and you’ll better understand how the placement of your investment capi- tal is very critical. WHYREAL ESTATE INVESTORS BENEFIT FROM INFLATION The properly leveraged real estate investor is one of the very few who reap the greatest benefit from inflation. Many have argued that inflation’s erosion of the dollar reduces debt— and they are right—but I have not found anyone to give more than the- oretical sound bites on the subject.

To provide more meaningful data on the subject, I partnered with Dr. John Abernathy from the accounting department at Kennesaw State Uni- versity to provide calculated evidence of the real “debt erosion.” UNDERSTANDING “GOOD DEBT”VS. “BAD DEBT” Before we get too much further, let’s tackle the notion of debt. We are all familiar with the concept of “good debt” and “bad debt.” I would not look at properly lev- eraged real estate as “debt” at all. Debt is something that hangs over one’s head as an obligation, and it follows a person around until the debt is satisfied—with only the per - son’s resources to draw from for repayment. With properly leveraged real estate, however, the investor has what can be considered the least liability in the transaction. Sure, the investor must guarantee the repay- ment, but consider the benefits as a middleman between those who have issued the funds for finance and those utilizing the asset for their personal use. Often metrics such as “cash on cash return” and “cap rate” are offered as ways to analyze a real estate investment’s potential as a good investment. These are good metrics, but they don’t offer the

32 | think realty magazine :: march – april 2022

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