It is most decidedly true that “all real estate is local” and that the commonly referenced “national real estate market” does not exist. One of the unique features offered in this forecast book is a detailed prediction for each major investment market that outlines the key ROI components. These components are the base value appreciation, leveraged appreciation, and cash flow from rental income.
Value appreciation represents the simple increase in property values for a market area. Leveraged appreciation represents the extent to which you realize additional return on investment because of the mortgage loan that allows you to purchase much more property than would have been possible with cash alone. Leverage opportunities vary, based on markets. Cash flow represents the rent revenues you receive from tenants, less expenses for the property. These factors combine to generate the total return on investment for properties in a given area.
Another Form of ROI is “Return on Inflation™”
Jason Hartman created the term “return on inflation,” which is a distinct advantage of investment real estate in that it offers the opportunity to generate a return on inflation. Broad price inflation results from increases in the money supply by the Federal Reserve. This ends up generating more dollars chasing after the same amount of goods and services, which inevitably precipitates an increase in prices. By borrowing money to purchase your property with a fixed-rate mortgage, it allows investors the opportunity to realize significant benefits when inflation rolls through the economy.
The way that this phenomenon unfolds is when the increased flow of dollars throughout the economy increases the nominal value of the property. The real value relative to other assets may remain unchanged, but the fixed-rate mortgage that was used to acquire the property will have its payments remain flat while the value goes up. In this case, the investor realizes all of the increases in value while paying exactly the same amount to the bank each month. We refer to this effect as “Inflation Induced Debt Destruction.” The impact of inflation reduces the real value of mortgage debt.
In addition to this, rents are likely to be pushed up by inflationary pressures as well. This will result in larger cash flows that increase profitability for investors. The driver of this increased profitability is also the fact that interest payments remain fixed and revenues grow faster than expenses. Thus, investors can generate real returns from inflation through the prudent use of leverage. This is the fundamental strategy behind our ROI predictions (Top image: Flickr | wvhomes).
The Jason Hartman Team