With the economy just coming out of a deep and scary recession, now is a great time to look ahead and anticipate the next phase. The government has obviously been spending a great deal of money in order to thwart a deeper recession by borrowing, i.e. printing money. When the government does this, the inevitable outcome is that inflation rises. It may not happen for a year or a few, but it is inevitable.
So, what should an investor do in order to maximize profits during an inflationary period? Stocks are usually a good bet, but in this economy, the stock market ran ahead of other markets in 2009, so one would not be buying a relatively cheap market. Bonds are not a great idea, as inflation raises interest rates, which simultaneously depresses bond prices. In other words, if you own bonds and rates rise, the value of your bonds falls.
My idea is to invest in an underappreciated asset that will rise as inflation rises: real estate. As everyone knows, real estate prices are low. They have been low for a little while now, so why is now the time to buy? I look at it like the perfect storm. Real estate prices are low, interest (borrowing) rates are low, and inflation is looming. If you are looking to buy real estate as a medium term investment (3-5 years), I think that now is a great time to invest. You can buy cheap assets with low borrowing costs, with the knowledge that inflation will soon raise both housing prices and interest rates. If I was buying, I would also try very hard to get an assumable loan, so that when inflation hits in the future and you want to sell, you can offer your buyer a low interest rate loan as further enticement.
One important thing is to buy real estate correctly. There are some great opportunities available all over the country, including the Crested Butte, CO area. From ski condos to luxury single family homes, some sellers are eager to sell their properties and these properties can be had for bargain prices. Now is the time to ride that perfect storm and make an investment that will pay off well in a few years time.
(Diane Aronovic is a former Managing Director at Bank of America Securities, and a real estate agent at Red Lady Realty in Crested Butte, CO)