| | The bailouts happening today are eventually going to lead to high inflation. Below is an e-mail I sent to the members of our company. It describes a way to profit from inflation.
Rental Properties: A Limited Window of Opportunity
Take a close look at the excerpt by Gary North I've included below. The forecast is stagflation starting in 2010: high interest rates, high inflation, high regulation, and high unemployment.
I'm going to break this down one point at a time. If North is correct about approaching stagflation, this affects our investing strategy.
- High interest rates: Low-interest, fixed rate loans will be available for only a short period of time. Getting these loans now and locking in today's interest rate will give us an advantage once rates go up. High inflation will lead to rising property values (in dollars). Rents will rise even faster than property values, increasing the cash flow on rental properties that are purchased and financed today.
- High inflation: When this happened in the 1970's, housing prices rose to keep pace with inflation. Property values in Oklahoma City rose faster than inflation because of the oil boom that inflation created. People who bought rental properties early on with fixed-rate, low-interest loans did very well.
- High regulation: A greater degree of government control over the secondary market and a greater degree of government ownership may make it harder for investors to get loans in 2010. If this happens, investors who get loans in 2008 and 2009 will have a great advantage.
- High unemployment: This will be bad in most parts of the country, but Oklahoma City will not suffer the same problems. Fuel prices will track with inflation, creating an oil and natural gas boom in Oklahoma City. Higher fuel prices will make it harder to import oil, causing us to look more toward domestic production. This is what happened in Oklahoma City from the early 1970's to the early 80's.
For these reasons, 2008 and 2009 will be a great opportunity, perhaps a unique opportunity, to purchase and profit from rental properties and lease options in Oklahoma City. I don't want to discourage the quick-flip strategy, which will work under any economic conditions, but the real opportunity to get rich will be had by paying interest on a 7.4% fixed-rate loan when inflation is running at 8% or more.
One Possible Scenario
If inflation is high and property values in Oklahoma City begin to rise at 15% per year, OKC houses will double in value every 5 years. If we buy an $80,000 house for $50,000 with a nothing-down loan (65% LTV) and the property value increases to $320,000, we can sell the house, pay off the loan, and make $270,000 on a purchase that was made with no money down.
Now think bigger: Buy 6 houses with nothing-down loans and sell one of them after the properties have doubled twice. Sell ONE of the properties, pay off all of the loans, and have 5 properties free and clear.
Think really big: Buy 60 houses, sell off 10, and have 50 free and clear.
I suggest that this is the fastest way to become real estate tycoons without using any of our own cash.
I am going to start moving rapidly toward this acquisition strategy. This is why I moved to Oklahoma City in 2006.
Time to get rich.
Stagflation
Now read an excerpt from Gary North's October 24, 2008 article.
The Federal Reserve System has recently pumped in new reserves at a rate of over 300% per annum. Unbelievable? This comes from the St. Louis Federal Reserve Bank.
http://www.garynorth.com/public/4178.cfm
There are not going to be stable prices in America; there is going to be stagflation on a scale that dwarfs the 1970s.
No matter what the average American has believed about the supposed increase of American stocks of 7% per annum, the reality of the 21st century is that no such rate of return is likely simply by buying an index fund of American stocks and holding until retirement. Inflation will eat up the returns. This assumes that there will be positive returns of 7% per annum. This assumption seems utterly naive to me. There is little evidence for this anymore. The entire decade of the 21st century points to the demolition of that dream. We are not out of the woods yet. The stock market can go down even more between now and the end of this recession.
When will the recession end? The optimists are saying that it will end in late 2009. The pessimists are saying that it will end in late 2010. I am a guarded pessimist. But whenever the recovery comes, it is going to come in a completely new context politically and bureaucratically. It is going to come after a year or more of legislation passed by Democrats in Congress and signed into law, no matter who is elected President in November. The new mantra is this: re-regulation. There is going to be re regulation on a scale that we have not seen since the mid-1970s. That was the era of stagflation.
More Stuff
I've also written previously about peak oil, using rental properties to profit from inflation, and the advantages of living in Oklahoma. Now is the time to get moving. |
| | Posted 10/24/2008 1:52 AM - 50 Views - 0 eProps - 2 comments
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