Inflation Up In 2007; Commercial/Investment Owners Performance Still Strong

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.

Last To Be Paid or First To Be Paid? You Choose

Let's repeat the lesson:

If you are a shareholder in a company, if there is a profit, you are the LAST person to be paid, assuming there is money left over after all bills and other debts have been covered.

When you own investment real estate, you are the FIRST person to be paid.

Why repeat the lesson? This week several analysts reported that banks will be forced to slash dividends in 2008. Many bank shareholders use these dividends as income. In fact, numerous companies are feeling a pinch on the revenue front these day.

So which makes more sense? Be last in line to be paid, or first in line? Which would you choose?

Thus endeth the lesson.

Federal Reserve Hints At 'Substantial' Rate Cuts

The Fed hinted at further rate cuts, which will be a further boost to investors. A rate cut is certain at the Federal Reserve's meeting, scheduled for the end of January. The question is how much? The story is at CNN money.