The stock market is a mess. Economic growth is weak. And inflation is skyrocketing…
Sound familiar?
How about this: Gas prices are surging. Meat prices are also spiking. And the American central bank’s easy-money policies are blamed as one of main drivers of the high inflation.
Believe it or not, but I’m not talking about our current predicament. I’m talking about 1970s America.
It was a period in time when the inflation rate shot up from 5.7% to 13.5% in just four years, and wages and prices spiraled out of control.
In light of our current situation, it’s a period I’ve been reading up on and I recently found a story that stuck with me. A gentleman remembers when his dad retired in 1972, he was collecting a pension of $120 a month. It was enough to cover rent for two months. However, less than seven years later, the same pension check was covering just two weeks’ rent in the same apartment.
It’s a powerful example of just how pernicious inflation can be. Even at rates that don’t look so high, continued over a few years, it can destroy the value of your savings.
Real estate is a physical asset with inherent value.
The Consumer Price Index shows that painfully rapid price increases continue to trouble Americans and bedevil the Fed. Inflation remains relentless. In September, the overall index climbed 8.2% over the prior year.
To tackle rising inflation, central bankers have raised interest rates five times this year and it’ll possibly even be six times by the time you read this. It’s another policy we saw enacted in the 1970s, when interest rates rose to nearly 20%. As the saying goes, history doesn’t repeat itself, but it often rhymes…
The Strongest Hedge Against Inflation
So, what can you do to protect your wealth from the corrosive power of inflation?
A number of investments can buck the trend of falling values when inflation is high. And some are better than others.
For instance, gold has long been considered an inflation hedge. That’s because it’s a physical asset, it has long established value (it’s been considered valuable since the Late Bronze Age), and it has a limited supply. You can’t print more gold. And sure, you can mine it, but extracting it is a costly process.
In other words, gold is robust in a way that paper money is not. And we’re seeing it being used as an unofficial currency in countries like Venezuela, where hyperinflation has hit staggering rates of nearly 3,000% in recent years.
However, gold isn’t the great investment performer that people often make it out to be. In fact, through October, gold prices have fallen by 10% this year, and when paired with inflation, that hands investors a double whammy of losses.
My other issue with gold is that it doesn’t pay any yields. This is important, because even if an asset class doesn’t see strong capital appreciation in the long run, yields can often make up for the shortfall.
That’s why for me real estate is the single best hedge against inflation that I know. It is a physical asset that has inherent value (you can use it for more than just a store of value as people will always need shelter). The land and building materials put into real estate have a tangible value. Values of homes tend to rise with inflation. And importantly, you can collect yields in the form of rental income, which also tends to go up as inflation bites.
With all these advantages, the right piece of real estate can offer you serious protection. And historic data proves it.
According to data from the U.S. Bureau of Labor Statistics, from 1967 to 2021 the price of housing has gone up 4.16% per year, versus an overall inflation rate of 3.93%.
If you bought a $100,000 home in 1967, it would be worth $901,165 today. This doesn’t account for any rental income you could have also collected, and over 54 years that would be a significant amount.
But let’s take a more dramatic example of how real estate can be a strong inflation hedge. For instance, in Turkey, where the inflation rate has climbed above 83%—a 24-year-high—real estate has been performing remarkably well. Even as the Turkish lira gets decimated, the real estate market has held its value, particularly in desirable places like Istanbul or along the Turkish Riviera, which are attractive to foreign buyers.
On average, real estate prices across Turkey rose by 96.4% in the past year. In Istanbul they rose by 106.3%. That means that even taking the high rate of inflation into account, real estate values are going up. Plus, the rising house prices also affects the rental costs, which went up by more than 100% year on year.
So not only can real estate values survive rising inflation, they often thrive. Indeed, inflation can itself be a driver of demand. In Turkey, the more the value of the lira goes down, the more people are driven to safe-haven investments like real estate. This in turn drives values higher as demand surges.
Protect Your Wealth and Profit
But, not all real estate is created equal. Where and how you invest is just as important as what you invest in. If you buy ordinary real estate, in a matured market like the U.S., you can expect more meager returns. But take a global view, invest in the right real estate overseas, and you can hedge against inflation while also benefitting from buying in a market on the up.
For instance, back in 2015 I bought alongside members of my Real Estate Trend Alert group in an upscale condo community in Cabo San Luas, Mexico. The RETA-only get-in price was $336,156 for two-bedroom ocean-view condos. Just this October, I was offered $600,000 for the same condo. That’s a gain of $263,844 were I to go ahead.
But I’m not accepting offers. Cabo is one of the hottest markets on our RETA beat. Scarcity in the face of surging demand is pushing prices up in Cabo—a trend that is only picking up speed and realizing its full potential. Ultimately, its more valuable for me to hold a condo in Cabo that’s appreciating in value than a currency that’s depreciating.
Plus, I actually like spending time in Cabo. That’s another great benefit of real estate. It’s real…I can actually use it. I get to spend time near the beach, and close to a cluster of incredible golf courses. And when I’m not there, my condo can rent long term for $3,500 per month. Best-inclass real estate like this will only become more scarce and more desirable as Cabo’s transformation continues.
My point is, with a deal like this, you can set yourself up not just to match the rate of inflation, but to significantly outpace it.
For instance, the potential gross yield my Cabo condo could make is 12.5%. Compare that to the annual rate of inflation in the U.S., which hit 8.2% at the end of September, and you’re way ahead. And like I say, if inflation continues to rise, your rental returns are very likely to rise too.
Indeed, the great advantage of a RETA deal is that we not only focus on a growing markets, we also get prices that regular retail investors don’t ever see. Our offmarketing pricing means that we can lock in incredible value right at the point of buying, and it means that our capital appreciation not only beats inflation but completely obliterates it. (See examples in the box.)
Inflation will continue to be a scourge for some time to come. But more than ever, right now there is opportunity to put our money to work in vibrant overseas markets. We do this by buying undervalued assets and locking in superstrong income and appreciation potential.
Buying at a low price is step one in locking in incredible yield potential. Buying something with huge appreciation potential is key to building wealth over the long term.
For me, real estate offers the perfect path to freedom—both financial and personal. Whatever is going on in the world, or however bad inflation may get, it gives you the freedom to go where you want, when you want, and create profit while you do it.
WHAT BEATING INFLATION AND SECURING PROFITS LOOKS LIKE
Beating inflation and securing real estate profits is far easier when you have an edge over regular real estate investors.
Members of my Real Estate Trend Alert group don’t wait for the retail market to bring us a good deal. We’re all about going out and finding our own great opportunities…and we use our group buying power to get discounts from developers, often as much as $40,000, $50,000, even $60,000.
In doing so, our capital appreciation can rise extremely fast. Here are just a few examples from the last few years:
• In 2020, I recommended condos in a community called Adega in the beach town of Lagos on Portugal’s Algarve. One RETA member bought a condo there for €480,000 and has since sold it for around €675,000. That’s a profit of approximately €195,000 ($193,015).
• In 2019, I brought RETA members an opportunity in Akumal on the Riviera Maya. In a community called Santamar, where RETA members were able to own two-bedroom condos minutes’ walk from the beach from $174,800. Prices here shot through the roof quickly. The latest numbers from the developer: a two-bedroom mezzanine-level condo with Caribbean views, which RETA members could own for $178,000, sold for $400,000.
• In 2021, RETA members got in on a deal from $188,200 for two-bedroom, ocean-view condos in Cabo, in a community called Cabo Costa. My local real estate contact says that if these were available for sale now, they’d go for a minimum of $300,000. A boost of at least $111,800. I bought a penthouse in Cabo Costa. The RETA-only price was $249,000, and one recently sold for $425,000. That’s an uplift of $176,000.
Like I say, these aren’t the kind of returns you’ll see in matured real estate markets. At RETA we aim to maximize the potential returns by buying in places that are undergoing decades of growth. And by using our group buying power we get big discounts which sets us up for rapid profits
Ronan McMahon is the editor of Real Estate Trend Alert and a contributing editor to IL. He spends at least six months a year crossing the globe in search of the best real estate deals worldwide. For more about his RETA group, and to become a member, go here: IntLiving.com/retamag