How does inflation devour debt?

It seems counter-intuitive and the idea that debt is GREAT for the real estate investor is one of the hardest ideas to communicate to property investors who show up on our doorstep eager to learn the right way to invest in real estate.

There are plenty of wrong ways. Paying off your mortgage quickly is one of the worst ways! Please believe us when we say this. It’s much better to put as little of your own money into the property as possible and try to stretch that note out to 30 years or longer if you can. This is how you make your banker take the majority of the risk.

But exactly how does correctly structured debt get paid down by inflation?

First you should understand the idea of “real” value versus “nominal value. Nominal means that a one hundred dollar bill from 1950 and a one hundred dollar bill from 2009 are essentially the same. There might be a few minor cosmetic changes but, in the absence of inflation, you could (theoretically) go to sleep in 1950 with your hundred dollar bill, then wake up 59 years later and the buying power would be the same. You could buy the same amount of stuff now as then

But inflation rears its ugly head and devalues your money so that your 2009 spending spree with that Benjamin Franklin comes to a screeching stop very darn fast. Take that idea and spin it around. While inflation is bad for you if you hold cash, it actually works in your favor if you’re a borrower. In nominal terms, your loan balance is the same in 10 years as it is now. But in real terms, inflation has devalued the balance to the detriment of the banker and the benefit of you!

Rest now. We’ll talk more about it later.

The Platinum Team

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