How to Beat Inflation through REAL ESTATE

Today, we’re gonna talk about how to beat inflation through real estate.

So, what’s inflation? According to the Merriam Webster Dictionary, inflation defines as “a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to availability of goods and services”.

So, what does this mean? The spending power of your money becomes smaller and smaller as the years go by depending on the inflation rate. Say for example, in the 1960’s if you wanted to buy a whole piece of chicken it would probably costs you around Php 5.00, if you wanted to buy half piece of chicken it would probably cost you a Php 2.50, unbelievable right?

Nowadays if you wanna buy something with Php 5.00 what would you get? I don’t know, a bottle of coke? Or probably some candies? Not much, right? Nowadays, the same chicken, same recipe, if you buy in same restaurant it would probably cost you roughly around Php 375 and the half chicken would probably cost you around Php 189. Quite a jump, right? From Php 5.00 to Php 375.00 and Php 2.50 to Php 189.00 that’s quite a high jump. So, what am I saying? And how is this related to real estate? Say for example, your lifespan will cover from the 1960’s all the way from today year 2018 as we speak, the total cost of living would be entirely different at the tail end of the timeframe we’re talking about.

In 2018, the cost of goods would be so different from 1960, if you travel back in time and you tell your grandfather “I want to buy a fried chicken for Php375” your grandfather would probably be “What! So expensive!”.

Now going back to inflation, for example, if we’re talking about a retirement fund that was promised to you way back in the 70’s that they will be giving you, I don’t know, probably a thousand pesos every month maybe that seem liked a good deal that time but nowadays if you have a thousand a month you really can’t buy much, right? So, how will you use real estate to protect you from inflation? The property has several facets that you can use to your advantage when it comes to protecting yourself so that you can secure yourself and your family’s future.

First thing is the capital appreciation, if you go back in time and supposed you wanted to buy a property in Ayala Alabang, probably in the 70’s it would have probably cost you anywhere between Php 250 to Php 300 per square meter. And nowadays, that same amount of money had you invested that say for example, you bought a 1,000 square meter property times Php 300 per square meters so you probably bought a Php 300,000 of course that would be a lot of money at that time, but as the time go by nowadays the same lot in Ayala Alabang would probably cost you anywhere between P50,000 up depending on the value it closed. So, if it’s Php 50,000 per square meters the same Php 300,000 money that you invested would probably worth around Php 50,000,000 nowadays.

From this example you’ve see that the capital appreciation of a property could compound through the years, so if you have enough savings you bought a property and there’s more inherent value that develops in the area then it could really work beneficial for you, your Php 300,000 is not Php 300,000 anymore, if you kept it under your bed in a treasure box it would still be Php 300,000 but since you invested it in a property the capital appreciation took place, and as you waited, you weren’t doing anything with the property, you just let it stay there without even talking about building a house renting it out, just buying it, letting it set, letting it accumulate more value through the years, you just do your job, do whatever, have a family, you know enjoy, go out in the country, go back have a vacation and when you look back your property has already increase in value.

So, that’s one way to protect yourself against inflation if you invest your money in real estate the potential capital appreciation could protect you from any possible inflation.

Just this year the latest inflation rate was roughly around 4%, so this means that if you have a 10 million pesos just for example, you probably have lost Php 400,000 already without you knowing it.

So, with regards of property if your property has increased in price at around 4% or 5%, probably at just at 4%, then you have passively gain probably around that amount Php 400,000, not bad right? So, the advantage really here is that it grows in value without you needing to get expert at it as long as it’s a good property that develops in value through the years meaning you’re gonna have commercial areas, road networks, the maintenance of the property is good, and then there’s schools so there’s a reason for people to live and work there, you have a life you know it could really work for you.

The second way the property could protect you from inflation is through rental income.

Normally a property where you sit still, either you use it or if you let it stay still if you can build something on it. It would be best to have it leased out because by leasing it out in addition to the capital appreciation of the property you’re also having some cash flow which is a very, very important as far as income is concerned.

If you’re having this passive amount of cash flow going to your bank account on a monthly basis, on a regular basis, that means you’re using the property and it is giving you back the fruits of your hard work. It could be quite heavy to purchase a property but if you use the property to create an avenue for it to be an asset that is gonna be delivering more funds and in to your account on a monthly basis then it’s gonna come back to you.

Now, as far as rental is concerned there are some property areas that can yield you to 3% at the minimum given the prices is quite high so the returns are at that rate. There are also some properties that can yield you 5% to 6% depending on the area again, these are all at quite precise figures right now. There are some properties if you buy it at the right price can even give you a yield of 8% to 10% which is quite amazing.

If you just leave it in other investments avenues normally the return is just around at 1%, so and so, not really attractive. But with regards to the rental rate, if you buy the property at the correct price it could really, really work for you, most especially for rental.

Now, the third way that a property could work for you in such a way as a hedge to beat inflation is, if you use it.

Now, when you live, which is of course when you start living when you get born into this world, you definitely will occupy space you’re definitely going to be the roof over your head, you’re definitely going to need your room, you know basically you’re gonna need a place to stay, house or condo whatever it may be, or apartment whatever it may be. Whether you bought it, or you’re renting the place its gonna cost money. Now, if you bought the property, you already to split the money three ways, you’re living for free, you’re earning through capital appreciation and later on when you leave it to upgrade you have a possibility of a rental income.

So, you not having to pay for a monthly rental already gives you phantom cash flow. You don’t see adding up in your bank account but don’t see a few deducted from your bank account either which is a very good thing.

What have we learned so far? Inflation is just something that we have to manage it’s a part of life, it happens. It’s not very favorable and it will definitely affect the purchasing value of your money a few years down the line.

Now, what do we have to do to counter it? We need to find some avenues that’s gonna be able to give you more cash flow so that you will be able to combat this. So, if you have a rental income, capital appreciation on your side, plus the appreciation in real estate usually compounds because the price increase is based on the price later on not on the price today.

If you go back to the example earlier if you bought that lot in Ayala Alabang for Php 300,00 the price increase in 2015, 2016, 2017 is not based on Php 300,000 it’s based on the price on 2016, 2017 which is already the high price.

So, it’s good for you, it compounds there’s a critical mass that it has to reach before it really compounds really well and you know, starts giving back to you. Simply put if you wanna make things simple you can even sell the property for the highest price, live off of that or if you aim for long term you can just build something, rent it out, live off the rental income and it could really work.

What have we learned today? Today, we learned that inflation is there to stay, but it doesn’t mean that we have to give in to it. There are ways and means that you can use real estate as an investment so that it can work for you and you can earn the money back.