January 15th 2020
Inflation. It can be a great friend or your worst enemy.
Inflation, out of control can be deadly. I was on a cruise out of Fort Lauderdale early in the year down the eastern seaboard to Panama. One stop was in Columbia. Cartagena to be specific. I found it an enchanting city, especially the old walled village. Walking around I encountered a young man selling what he claimed were collectible bank notes. Columbian pesos in 5, 10, 20, 50 and 100 denominations. Collectible because they were no longer in print or circulation. Inflation had taken care of that. The smallest denomination currently in print was 1,000 pesos, worth about 50¢ USD.
Later I met a member of the ship’s crew who was from Columbia. She told me how she had purchased a home a few short years ago and recently sold it. She made a tidy profit, but inflation virtually wiped out those gains based on world currencies. At the time she purchased it took about 2,000 Columbian pesos to buy one U.S. dollar. At time of sale that had changed to about 3,000 pesos for $1 USD.
Profit gone due to inflation.
But just imagine if she had not bought that property choosing instead to put her money in the bank, or in her mattress. Her net worth would have effectively shrunk by 50%.
A little inflation on the other hand is a good thing. It helps us feel like we are getting ahead, especially since wages generally keep pace. But it can be an illusion.
The Bank of Canada has targeted Canada’s inflation rate to be between 2 and 2 ½%. I think they are spot on. But think about it for a second. If for example wages have grown by 50% over the past 20 years or so (based on current inflation targets this would seem reasonable) that means someone who was earning $50,000 should now be earning $75,000. That’s great. But if over the same period, as is generally the case, the cost of everything from groceries to the clothes you wear has risen by 50%, you haven’t really gained any ground.
And this is where leveraging comes in. Leveraging as we’ve seen is making money by using borrowed funds. Consider a rental property for example. If over that 20 year period the value of the rental property increased 
by 50%, on a cash purchase, you broke even relatively speaking. But suppose you purchased it with only 20% of your own money. The property for example was bought for $400,000 with $80,000 down. Over that 20 year period, based on simple inflation the property value grew to $600,000. That’s a $200,000 increase. But considering you only invested $80,000, your equity grew by 150%, instead of 50%.
That’s harnessing the power of inflation. But to do so you need to put your money into a revenue producing asset and you need to use a substantial amount of borrowed funds.
And this is where real estate is such a powerful investment. It’s easy to leverage, because mortgage funds are secure and banks are generally willing to lend. Because rent will generally more than handle the cost of borrowing, and because especially in the Niagara Region and through the Golden Horseshoe real estate will generally appreciate much more quickly than the cost of living. (Accelerated inflation due to relative security and growing demand), real estate will prove to be a powerful and very profitable investment.
Wayne Quirk, Author
“THE MONEY MACHINE”
wayneq@remax-gc.com