Citylife Investor News
21 April 2009
CITYLIFE INVESTOR NEWS The Australian Investor and Property Buyers
Newsletter **************************************************** 21 April 2009
STRATEGIES TO BENEFIT FROM INFLATION: With the UK and the US engaging in "quantitative easing" and flooding the economy with money, many economists now fear inflation may return.
Since a powerful new inflationary trend is a strong possibility, the prudent investor should probably take steps to guard against it, and even to benefit from it. "But wait a second!" some readers may be saying. "What if deflation occurs first?"
Good question. It might. But we'd begin preparing for inflation anyway.
At the very least you have got a good property investment, and at the very best you've taken advantage of powerful inflationary forces.
To us, inflation seems like a near-certainty. Not an absolute certainty, mind you, just a near-certainty, sometime within the next three years. So why not beat the rush to buy inflation insurance? Why not buy some now?
"Clinging to cash equivalents at present yields is almost certainly a terrible policy if continued for long. Holders of these instruments, of course, have felt increasingly comfortable --
In fact, almost smug -- in following this policy as financial turmoil has mounted. They regard their judgment confirmed when they hear commentators proclaim "cash is king," even though that wonderful cash is earning close to nothing and will surely find its purchasing power eroded over time"
Warren Buffet, Feb 2009
Traditionally, gold (liquid) and real estate (not liquid) have a reputation as good inflation hedges. In the case of "hyperinflation," hard assets such as precious metals and real estate are normally viewed as inflation hedges, while the value of paper-based assets such as stocks, bonds, and currency erodes rapidly. With real estate you can BORROW (which is good in inflationery times) and you get a return.
Most cash savings can be eaten up quickly in high inflationary times.
There are two types of investments that are traditionally favored as inflation hedges: precious metals and real estate.
If it is real estate you are after, Australia may well prove to be the preferred choice for safety, as it offers a "safe haven" status, is not yet printing money, and its real estate markets have not fallen anywhere like the US and the UK, due to a massive UNDERSUPPLY of new homes, and a rising population, a shortage of land, and record migration.
If it is Australian property you will use as your hedge, look for the following: SOME SUGGESTED AUSTRALIAN PROPERTY STRATEGIES TO BENEFIT FROM INFLATION:
If you have read information on inflation (www.inflation101.com) then you will be aware that the worst thing to hold is cash, and the best thing is real assets and to have some (manageable) debt. If you feel Australian property is the correct hedge for you, then here are our suggested strategies you may want to consider to adopt to maximise the effects of inflation to your benefit: (as always seek professional advice before making any investment decision).
1. Lock your loan interest rate in for as along as possible when they are low.
2. Take an interest only loan for at least 10 years, but ensure principle payments are optional so you can make them without penalty whenever you want to (Inflation will "reduce" your debt for you).
3. However, start to pay off as much principle as you can on each repayment as soon as you see interest rates starting to rise, so that when rates to head back up you are sitting on a nice little buffer.
4. Once you have enough "buffer" or equity in place, do not pay off any more principle (as the debt will be reduced by inflation in tomorrow's dollars).
5. Ensure you own investment properties that will always be able to be rented out in locations of tenant demand.
6. Over time your mortgage and its repayments will lose its value due to inflation. That is they are getting cheaper. So if you can find a way to delay repayments you will make more just due to inflation. A simple way is to only repay the interest, and to make payments in arrears, at three or better still, at 6 monthly intervals.
7. Never repay the loan principle or sell the property.
8. Buy a cheaper property such as a small commercial office where rents are tied to the inflation rate.
9. Buy an "off the plan" residential, using just 10% deposit, with a long completion. If inflation hits, your asset price has risen and it was secured with a very low cash amount.
10. And most importantly, do not be paralysed with fear and take NO action, as inflation will eat away at any cash you have.
AUSTRALIA'S PREVIOUS INFLATION RATES Many younger people have absolutely no first hand experience with inflation. But for virtually 20 years, right through the 1970's and 1980's Australia had very high inflation. Many people made fortunes by holding real estate through this time.
But since the early 1990's inflation has been under control, so many people just do not have the experience to benefit from it.
1990 - 6.9% 1980 - 9.2%
1989 - 7.8% 1979 - 10.1%
1988 - 7.6% 1978 - 7.7%
1987 - 7.1% 1977 - 9.3%
1986 - 9.8% 1976 - 14.2%
1985 - 8.2% 1975 - 14.4%
1984 - 2.6% 1974 - 16.3%
1983 - 8.6% 1973 - 12.9%
1982 - 11.0% 1972 - 4.7%
1981 - 11.3% 1971 - 7.3%
"One ought never to turn ones back on a threatened danger and try to run away from it. If you do that, you will double the danger. But if you meet it promptly and without flinching, you will reduce the danger by half. Never run away from anything. Never!"
Winston Churchill
------------------------------------------------------------------------------ Copyright 2009 The Citylife Property Group. All rights reserved. ~~~~~~~~~~~~~~~~~~~~~~~~~~~ Own an investment property already? Need the best PROPERTY MANAGER? Here is Citylife's recommended Property Managers, Australia wide:
www.citylifeproperty.com/pp_34.asp
------------------------------------------------------------------------------- Off plan properties for sale: www.citylifeproperties.com -------------------------------------------------------------------------------
Looking for a Mortgage? www.australianmortgageinfo.com ------------------------------------------------------------------------------- Contact Us: If you have specific requirements, wish to ask any questions relating to your personal situation, or have any questions, email us direct at:
info@citylifeproperty.com
------------------------------------------------------------------------------- This message and any attachments may be confidential and/or legally privileged. If you received this message in error, please do not copy or distribute it. To the extent that this email contains information for investors Citylife does not warrant that it is accurate or complete and no responsibility or liability is accepted for the consequences of any actions taken on the basis of this email. Information provided is of a general nature only, and investors should seek their own advice.
| 