We’ve nibbled around the edges of the topic in the past but let’s cut right to the chase. Why is long-term, fixed-rate real estate financing the AIPIS modus operandi when it comes to building wealth? Why do we preach it to AIPIS students and suggest you do the same to your real estate customers? The simple truth is that, assuming continued inflationary times, which seems a pretty safe assumption to make, there is not other method of investing that we know of designed to make you wealthy while the rest of the asset markets around the globe are shriveling into desiccated pieces of undervalued paper.
As stated, our real estate financing hinges on the presence of inflation. What real world effect does inflation have? It reduces buying power if you’re a consumer. That’s not good news but what if you’re a borrower? Normally, you don’t want to be a borrower but in this particular instance it’s not a bad thing. Here’s why. The bank offers you a loan to purchase a piece of property that you plan to rent to a tenant. For simplicity’s sake, let’s say the note works out to an even one million dollars – you owe the bank one million plus interest with a mortgage that runs for the next thirty years.
In essence, the lender agrees to give you one million dollars to use however you like at today’s rate of inflation. We can almost guarantee you that, in thirty years, a dollar will not buy nearly what it buys today. See the effect? Each year that passes allows you to pay off your loan in steadily devaluing dollars. In real terms, by the time you pay it all off, the bank’s future one million dollars wouldn’t come close to buying what a million of today’s dollars will. Maybe the dollar will have devalued by 25% which means your lender receives, once again – in real terms – only about $750,000 payback on the loan when expressed in purchasing power. Of course, there will be interest paid and no shortage of extraneous and miscellaneous fees and charges – don’t worry about the banks – as long as they stay away from another sub-prime mortgage fiasco, they’ll make out alright.
But not as good as you when your real estate financing is structured the right way.
The AIPIS Team
Flickr / Reuben Whitehouse