“Inflation investing” or income property investing, as Jason Hartman refers to it, can be a tricky concept to communicate to your clients. To a mortgage professional accustomed to thinking of the idea of “real” vs “nominal” value, it may be second nature to understand how rising inflation turns a debt (your mortgage) into a financial instrument of rising value. Let’s examine a quick three-step process that might be illustrative for a client struggling with the concept.

Reduce the Scale
Sometimes it’s easier to begin thinking about a new idea on a smaller scale. Rather than talking to a potential income property investor about how inflation reduces the value of a massive mortgage, first talk about how inflation reduces the value of currency – how it is the prime mover behind the reality of rising prices and getting less for your money.

A Single Dollar
Now that you have them thinking smaller, introduce a real world example of how rising prices create a less valuable dollar. For an example, let’s say that it is January 1, 2013 and we have looked into the future to find out that the annual rate of inflation for the coming year will be 10 percent. Don’t worry about how we found out that information. Extrasensory perception. Time machine. Make something up. The important thing here to get them locked in on the inflation rate. Under the given conditions, that dollar in your pocket on 1/1/2012 will only be worth .90 cents on 1/1/2013. Why? It’s simple math. When prices inflate by a given rate – in this case 10 percent – the real purchasing power of your dollar bill drops by the same percentage.

Go Out Another Year
By now you should have your rapt student understanding how a year’s worth of inflation sucks part of the value out of a dollar bill. Now it’s time to broaden the horizon so he understands the effect over time. There you are on 1/1/2013 holding a one dollar bill that, once again, in real terms, will only buy .90 cents worth of goods valued on 1/1/2012. Let’s go out another year, to 1/1/2014, and see how things shape up. Assuming another 10 percent inflation rate, and your dollar – which has already been devalued to .90 cents – takes another hit and is reduced to only .81 cents in real buying power.

By that time, most thinking people are beginning to feel a little panicky at the idea that, over two short years, every dollar they own has fallen in real value to .81 cents. While some might scoff and point out that the government’s inflation rate is traditionally only about 2-3 percent, our research indicates the actual number is much higher.

The bottom line is that inflationary times reduce the value of money. Logic tells you that you need to find out what is the opposite of money? That’s easy. Debt! Not just any debt, though. Only long-term, fixed-rate debt in the form of a mortgage tied to a piece of income producing property will do the trick. (Top image: Flickr |  rychlepozicky.com)

The AIPIS Team