So you believe my Hyperinflation theory - what do you do with your money? (Option 2 - REITs and Real Estate)
The key thing about hyperinflation is the rapid incineration of value - or as my partner @toddDowl would say – your money is now like “an ice cube in the sun”. What would you do if you knew the $100 in your pocket is going to be worth less than $50 in effective purchasing power in a year (and you did not like my first option:buying TIPS)?
Option 2. REIT’s and Real Estate (or aka - “oh my, do I the right mortgage”)
I’d say go buy something physical that would maintain its value even in adverse conditions. Many would tell you that’s gold, hence the more recent herd mentality on ADRs and gold denominated funds. Gold is a practical material with many commercial uses and it is probably the only physical asset that can be converted to a currency in an easy transaction like presenting it at a bank.
Unfortunately, I cannot get myself to buy gold because (a) I think it is tacky (it is a personal thing) and (b) right or wrong, I believe the value of gold is arbitrary - more an indication of supply and demand (of irrational investors like me looking for protection) and nothing to do with the real value of the commodity itself.
So instead, it might just as good to focus on your own real estate portfolio. You can (a) re-examine your mortgage and make sure you are setup properly against hyperinflation; (b) buy your first home if you can get the loan or (c) If you have cash sitting on a money market account in a bank (that just got yet another bailout loan) you can make a real estate investment or (d) if you don’t want to deal with all the hassle of ownership you can buy into a REIT.
This is all about practical advice so let’s look at REITs first:
REITs have gone through mega share price adjustments – and rightly so. At the same time, because of the steep decline in share prices, the spread between equity REIT yields and the 10-year treasury are at a historical high. Lodging REIT yields are at 19%, industrial at 16%, apartments 12%, retail 10%. Most are already cutting dividends as their cash flows decline bt the spread will continue.
I would stay away from lodging, and retail for obvious reasons but if you stick with well capitalized REITs that use operating cash flow to pay dividends (ex. Boston Properties - BXP), in the long term my bet is that this strategy (a) would beat treasuries by a healthy margin and (b) gain equity value from the recovery.
Now let’s talk about mortgages and buying real estate:
If you have something like a 5/1 ARM or 10/1 ARM that has less than 3 years left in the fixed portion, it is time to get into something longer term (10 years fixed at least) now! I would go back and read the mortgage documents carefully, figure out the max interest rate you’d pay in case LIBOR starts to fluctuate; how often the rate gets adjusted etc. The last thing you want is to get caught with your pants down - an adjustable rate mortgage as the interest rates start climbing up rapidly. That’s how people get bankrupt.
Alternatively, if a bank is willing to give you a long term loan with a great fixed rate take it – if hyperinflation hits, the interest payments would cost you less than a Starbucks cup of coffee.
It’s pretty hard to time markets in general – especially in real estate. In the last 10 years any time was a good time to buy and sell until we all hit the wall. The prices have gone down dramatically already and still have a ways to go. The realities of unemployment are slowly starting to hit major metropolitan areas like NYC, Boston or San Francisco where real estate prices were bid up to a ridiculous levels . The picture is even worse in the secondary homes market and not so different in commercial real estate either – I drove through Rt. 20 in the greater Boston area last weekend. It was striking how many homes and commercial properties are for sale in this coveted stretch of land.
If it is bad today, it is going to get worse in 6 months, prices will go down even further and may not recover for years (one good thing about hyperinflation is that at least on paper your home would gain value even if it loses value in real dollars). There are already a number of ready and willing sellers out there and not too many buyers.
Buying real estate is a very tricky proposition and comes with a lot of headaches but if you buy well - something you like at a price you can afford even if it gets really bad and don’t have to sell it prematurely and enjoy it while you own it - live in it, vacation in it, rent it to a friend - it can be a great long term investment for value protection.
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