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The Price of a Cup Of Coffee — Why Investing is Critical

We have talked in the past about the importance of investing in real estate to protect your wealth from inflation. With another 8.3% annualized inflation clocked for September, let’s revisit the perils of inflation using a simple metaphor — the price of a cup of coffee.

How Inflation Erodes Purchasing Power

Let’s say the average cost of a cup of coffee at Starbucks is $5. If inflation averages 8% over the next 2 years, two years from now, that same cup of coffee will cost $5.83. 

 

Boo hoo, right? Maybe you’ll have gotten a raise, or tightened your belt, or won the lottery, or moved to South America, and you’ve been meaning to cut back on caffeine anyway. Why worry?

 

Let’s apply the cup of coffee metaphor to your wealth and net worth… 

 

You have $25,000. How many cups of coffee can you afford today? 5,000 cups of coffee at $5 a cup.

 

Let’s say you decide to keep that $25,000 in the bank, how many cups of coffee can you afford two years from now? Only 4,288 cups of coffee. 712 fewer cups of coffee in 2 years! The same amount of money buys less coffee. Effectively, you’re a lot poorer than you were two years ago. The solution and your goal should be to invest your money to outpace inflation.

Chasing After Yield

Let’s say you invest in a security that has a 9% yield, which is an average stock market return. In two years, your $25,000 is worth $29,700.

 

How many cups of coffee can you buy then? You have enough for 5,094 coffees at $5.83 a cup. The challenge here is to consistently achieve high returns. Can you achieve 9% return on your investment every year? 

The Power of Real Estate

Here’s the amazing thing about real estate investing in times of inflation — it causes asset values to increase, but it causes the value of debt to decrease. After all, that debt is measured in dollars, which has lost purchasing power at a rate of 8% per year!

 

Let’s say you use your $25,000 to purchase a real estate rental property worth $100,000. You pay $5,000 in closing costs, put $20,000 as down payment, and get a $80,000 mortgage. 

 

If this property appreciates at a modest 2% a year, your property is worth $104,000 two years from now. During that same period the property was rented out. The rent you collected paid for your mortgage, taxes, insurance and property management fees, AND over 2 years, you generated $6,000 in positive cash flow. On top of that, the rent also reduced the amount of your loan to $78,500 (you paid down $1,500.)

 

Now, how much is your investment worth? At the end of two years your $25,000 investment is worth $32,500.

 

How many Starbucks can you afford now? Over 5,574! 480 more cups of caffeine than the stock market investment. In a very short two year period, you increased your purchasing power significantly, whereas in the first two examples (stashing cash and a 9% stock market investment) you either lost purchasing power or barely maintained it by taking significant risks.

 

And guess what — it gets even more excitingly dramatic as you increase the investment period. The most positive results are possible through appreciation and leverage.

 

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If you know it’s time to get serious about inflation, reach out to MartelTurnkey today. We have cash-flowing, fully-renovated homes ready to go for investors. Protect your wealth the wise way. And as a bonus, our cash flow spreadsheets include 10 year projections too. 

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Get Your Investment Strategy In Gear Before The Year Is Over

Happy October, and welcome to Q4 2022! You’re probably formulating your holiday plans right now … and it wouldn’t hurt to start formulating a Q4 capital allocation plan along with it.

 

Q4 is a busy time at MartelTurnkey. Our long-time investors usually pull up their shopping carts, looking for deals. Of course, this means our inventory will probably get far more slim over the next month or two, so if you’re thinking about investing, we should probably move forward the conversation ASAP. 

 

Why is Q4 a great time to invest? The answer, as it so often is in real estate investing, is tax advantages. Buying a turnkey rental in the back quarter of 2022 can make the tax return you file in April 2023 much happier. (Or at least, happier for you. Maybe not so happy for the IRS.)

 

You get two major tax advantages for investing in Q4 …

Deductible Expenses

As we have discussed in previous articles, real estate investment is a business. If you own rental real estate — even a single turnkey rental house or condo — you are a business owner, and as such you are eligible to deduct a slew of expenses that homeowners just don’t get to. 

 

Homeowners get to deduct their mortgage interest … but they don’t get to deduct their insurance premiums, repair expenses, utilities, etc. 

 

This is true of every real estate investment, but Q4 amplifies that effect. The most expense-intensive times in the life of a real estate investment are at purchase and at sale. In the case of purchase, you have closing costs, loan fees, and startup costs. 

 

That’s a lot of deductible expenses that you can tack on to your 2022 tax return at the eleventh hour. There are ways to maximize that deduction even more — for example, pre-paying your insurance premiums for a full year.

Year-1 Depreciation

Again, we’ve talked about this before, but it bears repeating — depreciation is a real estate investor’s best friend. 

 

What is it? It’s a deduction you’re allowed to write off your taxes for “wear and tear” of the property, based on the assumption that the property gets less valuable with age and use.

 

Of course, real estate tends to appreciate in value over time … but you still get to take the deduction. It’s a writeoff that you don’t have to actually spend money to claim! 

 

Homeowners don’t get to do this — only real estate investors. You have to “recapture” that depreciation if you sell the property for a profit … but your recapture of that depreciation may be capped. 

 

You can start depreciating your property as soon as you acquire it. Your first-year depreciation will be prorated based on the percentage of the year you owned the property. 

 

For investors who want more deductible expenses in 2022, investing in real estate in Q4 is a no-brainer.

 

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If you want these tax advantages for 2022, time is running out. Our inventory is limited, and we expect significant demand per usual in Q4. If you want one of these renovated, tenant-in-place, cash-flow-generating turnkey rentals to be yours, reach out to us today!