Inflation & Property Investment, Why is it so Powerful?

How Inflation Impacts Property Investment in Australia

Inflation is the rate at which the general price level of goods and services in an economy increases over time. In Australia, inflation has averaged around 2-3% per year over the past few decades, although it can vary depending on economic conditions and other factors.

The eroding effect of inflation on debt can impact property investment in several ways. One way is that inflation can increase the value of real estate over time. As the general price level of goods and services increases, the value of property can also increase, particularly in areas with high demand and limited supply. This means that investors who hold real estate can potentially benefit from long-term capital growth and appreciation.

However, the eroding effect of inflation on debt can also benefit property investors. As mentioned earlier, investors who borrow money to invest in property can benefit from paying back their loans with less valuable dollars over time. This means that even if the nominal value of their debt remains the same, the real value of their debt decreases over time as inflation erodes the purchasing power of the dollar.

Here is an example: Assuming an inflation rate of 3% per year, the value of the dollar decreases by 3% each year on average. This means that the purchasing power of $400,000 in today’s dollars will decrease over time.

After 10 years of 3% annual inflation, the purchasing power of the $400,000 debt would be reduced to $266,584 in today’s dollars. This means that the real value of the debt has decreased by 33.35% over the 10-year period.

Therefore, if an investor holds a mortgage debt of $400,000 and experiences 3% annual inflation, the real value of their debt would decrease by approximately one-third after 10 years. This benefits the investor by reducing the real cost of borrowing and increasing their overall return on investment in the property.

Overall, the impact of inflation on property investment in Australia can be complex and varied, depending on a range of factors such as economic conditions, interest rates, and supply and demand dynamics in different property markets.

How the Wealthy Exploit Inflation to Invest in Property…

The wealthy exploit the eroding effect of inflation on debt to invest in property in several ways. One way is to borrow at a low interest rate and invest in real estate that appreciates faster than the inflation rate. For example, if an investor can borrow at a 4% interest rate and invest in a property that appreciates at a 6% annual rate, they can potentially earn a positive real return of 2%. This is because the property is appreciating faster than the inflation rate, and the investor is paying back their loan with less valuable dollars.

Another way to exploit the eroding effect of inflation on debt in property investment is to use inflation to reduce the real value of their debt. For example, if an investor has a $400,000 loan with a fixed interest rate and the inflation rate is 3%, the real value of the debt decreases by 3% each year. This means that the investor pays back the loan with less valuable dollars, effectively reducing the real value of the debt.

(See above example)

Overall, the eroding effect of inflation on debt benefits property investors, who are willing to take the time to understand how it works and how to benefit from it. As always careful planning, research, and risk management are essential to maximize the potential benefits and minimize the risks of investing in property.

If you want to learn more about how to take advantage of this hidden secret, feel free to reach out below and we can have a complimentary meeting about your situation and road map a plan to get you into property investments that beat inflation.