I can’t help but think that with all the money the Government is dumping into the economy, particularly money we don’t have and must borrow or print, that our country is due for some serious inflation in the somewhat near future.  You can’t dump trillions of extra dollars into an economy and expect the value of the dollar compared to the cost of goods to stay the same.

So, in my macro-economic scope, if this is what’s coming, how can I capitalize on it?

If you believe that inflation in our country is around the corner, where can you put money to either hedge against the negative trend, or perhaps increase your return?  To answer that question, you have to understand what inflation really is in order to know where to funnel your money.

What Does Inflation Mean?

Inflation is the rate at which the general cost of goods and services compares to purchasing power for those goods and services.  For instance, if the value of the dollar goes down and the intrinsic value of, say, toilet paper stays the same, it will take more dollars to buy toilet paper with rising inflation.

There are lots of things that could devalue the almighty dollar, and directly diluting the value by printing more money is one of them.  If you put it in investment terms, it’s a bit like diluting stock by printing more shares to raise capital.

To be certain, sometimes diluting stock or currency can be a good thing so long as the return on that money is greater than the cost of borrowing the money in the first place.

So how do I hedge against inflation?

Gold.

Gold has been the time-tested and preferred hedge against inflation when markets panic and governments try to “help”.  The reason?  Gold is the universal currency that holds its own value.  Sure, it’s valued in US Dollars on the open market, but since its accepted as a form of payment around the globe, the real value of the precious metal precedes the US currency.

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Economics, Investing crude oil, GLD, hedge, Inflation, investment, TIPS, treasury

After my visit to the termite palace yesterday, the real estate agent told me she’d keep an eye open for more property in the area. The question then became: What is your criteria?

My first rental property ended up setting the bar very high. I bought it from a bank, put less than $10,000 into it for rehab and renovation, and rent it to students. Overall, my net cash flow is $345 per month. So I guess those traits could start the list.

1. The property must be within 3 blocks North of the local University.

Talk about narrowing the field! This is probably the most restrictive of my criteria, but I have good reason for putting it in place. The area to the South of campus is fairly worn down, crime is higher, and it’s generally just a less attractive area. By in large, this means that I couldn’t rent the same house to the South of campus that I could to the North of campus. In short, the margin is smaller.

Additionally, the campus is bordered by two main streets, one on either side. To the West of the main street are upscale neighborhoods that sell for more than $300,000. Not at all conducive to renting out, especially to students.

To the East of the opposite main street is what we call “the hood”. You can find houses for $20,000 but you better bring protection if you care to visit.

So that limits my search to about 9 square blocks.

2. Must be able to purchase for less than $60,000.

The general consensus is that a property should rent for 1% of the sale price. But that if the sales price matches the appraised price.

When you look at renting to students, look at what rent should be per room, not for the overall house. In my area, it’s not unreasonable at all for a single student to pay $300 per month for one third of a 3 bedroom house. So if you have a two bedroom house, the rent should be about $600 per month. Any premium to that should be justified by a service or resource in return.

3. The high dollar issues must have already been fixed.

This is one I’m willing to budge (a little) on.

I’m looking for a place that has already had the plumbing overhauled, electrical box and wiring replaced, and fairly new air conditioner and furnace installed.

I’m willing to foot the bill for a new air conditioner and furnace. That work would have to be hired out, but you’re not looking at a lot of labor expense, and the job can be done in a day, maybe two.

Plumbing and electrical is a major task, one I’m not up for doing myself, and not willing to pay to contract out.

However, if the price is right, I could be swayed on this rule.

4. The place must be structurally sound.

Along the lines of rule number 3, the property must not require major structural work. This translates into big money. Simple stuff like replacing deck structure I can handle, but I’m not willing to replace floor joists and certainly not willing to replace walls because termites ate them out!

5. The property must be a 3 bedroom, and 1 bath, minimum.

The fewer bedrooms, the harder it is to rent. The difference in list price between a two bedroom and a three bedroom house can not be recouped by using my $300 per room rule of thumb. Consequently, you’ll end up asking for a premium in rent for less square footage and end up having to concede more services (lawn service, laundry appliances, etc.).

6. Must be able to rent to students.

The university in the area is fairly affluent itself, and it caters to those who come from affluent families. Accordingly, paying for rent is not a large part of the overall college budget. Therefore, the students that attend this college are a bit less stingy when it comes to negotiating rent. And given the fact that there are few nice (and relatively safe) places outside of campus to live, the premium is somewhat justified.

So what do you think? Are my criteria too strict? Am I missing something?

Investing, Real Estate, Rental Property college students, investment, Real Estate, Rental Property