Wednesday, January 02, 2013

Stocks, Gold, Dave Ramsey And Inflation

... and real estate. The title was getting too long.

A while back, I linked to a zerohedge post that described the inflationary sweet spot for stocks which turned out to be in the 4% range. That is, as an inflation hedge, your stock returns were best when inflation was between 2 and 6%. I didn't like that analysis as inflation hitting 6% is going to be a way station to much, much bigger problems. Tiny increases in interest rates are going to obliterate the Federal budget through mammoth increases in debt servicing costs.

So stocks are not my favorite investment. How about gold? Well, I understand the arguments made by several of the SLOBs, but I'm not a big fan for anything other than small amounts of it. It's a rock. It just sits there. It's subject to manipulation. It only pays off when you sell it.

Where does that leave us? For me, it's rental property. Middle to low-end housing that you can rent out for a reasonable rate and hopefully keep occupied most of the time. The rent would have to cover at least the mortgage and repairs for starters so it would be cash flow neutral. It has the advantage of being a source of income and in inflationary times, the income would go up while the mortgage would stay the same.

This is where Dave Ramsey comes in. Buy with cash or almost all cash. If you need anything more than a small, fixed-rate mortgage, you are courting disaster. A rental property with an unemployed tenant can turn into a real money sink if you've got a mortgage. Here in California, it takes 6 months to evict someone, so that would be 6 months of mortgage paid with no rent to back it up.

Another issue with California property is Proposition 13. Way back when, the state government was endlessly raising taxes on property. Proposition 13 put an end to that. With the state facing a fiscal crisis and the Democrats having a super majority, there's no telling what will happen. If they can even partially rescind Prop 13, California property values will get whacked.

To me, that seems to suggest buying rental property in another state. Perhaps a retirement house you can rent out in the meantime. Paying cash for it, too. Sound good?

Actually, there are three other things you could invest in as well.


Jeff Burton said...

Rental properties come with their own set of headaches. Just off the top of my head: a) tenant friendly legal system, b) crappy tenants, c) maintenance, d) fluctuating rental markets. Point b is the killer for me. I do not have the personality to deal with the kind of human tornadoes who are a significant percentage of renters.

Just talk to someone who has been in this game a while, and they will talk your ear off. Ramsey has enough money and scale to insulate himself from the pain. Most of us do not.

Rental properties are not a silver bullet but neither is silver. Pick your poison.

K T Cat said...

Jeff, great comment. I've had tenants who were drug addicts, so I know the issues associated with bad renters. Still, it seems to me to be a pretty good inflation-hedged income source. If the rent is high enough above the mortgage plus repairs, you can always get a rental agency to deal with the tenants.

W.C. Varones said...

I am a huge Dave Ramsey fan, though he doesn't understand gold or the global competitive devaluation dynamic.

What a wonderful world this would be if everyone followed his advice and stopped using debt for consumption.

Secular Apostate said...

Jeff nailed it. My spouse and I considered buying rentals. Fortunately, the wife is an attorney and looked at the eviction regulations in TN (a conservative state) and our neighboring states. Combine Jeff's (1) and (2), and you have, in the words of the old George Jones song,

"heartaches by the number, troubles by the score."