I have said in previous posts that holding investment real estate is a hedge against inflation. Well, the Department of Labor is reporting today that wholesale inflation last year shot up by the largest amount in 26 years.
The story notes that the 6.3 percent increase in the Producer Price Index, which measures cost pressures before they reach the consumer, followed a much more moderate 1.1 percent increase in 2006. Read the entire story here.
To review a bit, investing in and holding commercial real estate is a hedge against inflation. While the media is obssessed with the decline in residential property values, commercial property is holding its own, and in many cases, still appreciating. Holding investment property gives you income to cover the mortgage used, if necessary, to purchase the property. But more so, an investment property's appreciation is truly "wealth forced upon the property owner." As it becomes more valuable, the property owner can make tax-free loans to him or herself for pretty much any use, including acquisition of additional property.
Keep in mind that the lending problems you are hearing about on the television news each night have to do with residential paper. What is of concern is traditional lenders, so heavily invested in the housing market, may struggle a bit. And we will have to watch and wonder whether we want to run our commercial loans through these same investment houses as we monitor their turmoil.