Is it correct to think: when the government prints money and I buy 3 houses, then when the price of house doubles, I get 1.5 houses for free?

Question

It actually happened in a similar fashion in the US: in 2015, the price of a townhouse nearby was $850k.

Then about 1 year later, the price of it went to $1.5 million.

For simplicity's sake, let's say it went up exactly double, such as from $800k to $1.6 million.

Does that mean when the government starts to print money, and when you see a cappucinno goes up from $3.25 to $4.4 and lunch from $8.95 to $12.95, then

1. Let's say if you are able to put down 15% down payment to buy 3 houses, each one is $1 million

2. When the price of them actually goes to $2 million (and suppose price of the lunch and everything else also doubles)

3. Now you sell the third house, and get $2 million, and then use that $2 million to pay off your first and second house (and also the 3rd house). So now you get 1.5 houses for free.

So you may be able to semi retire. Or suppose if you can buy 5 or 6 houses and get 2 or 3 houses for free, then you may be able to retire.

The simpler math is: if the 3 houses double in price, I gain $3 million if I sell them all. So if I move to a lower cost area such as Colorado suburb or Florida, I maybe able to retire. (thanks for @littleadv for pointing out the tax. So if I just earn $2 million and go to Colorado suburb and buys 5 houses at $400k each, then I can live in one, and take rental income for 4 houses and retire)

Is it really so?

Answer 1

If you have enough cash for all the downpayments and reserves and enough income to qualify for all the mortgages - yeah, sure. That's leveraging. Those who can afford it most definitely gain from high inflation while holding appreciating assets. But you should already be wealthy enough to begin with, otherwise no-one will give you millions in loans to buy multiple houses at 15% down.

There's also a tax component though, so you sell the home for 2M when you bought it for 1M - you have 1M of taxable gain (assuming you didn't live in it). Also, since you only paid 15% in cash (downpayment), you have the remaining loan to repay. So you don't actually get 2M in cash, you get 30-40% of it (depending on state income tax rates and the probably large remaining mortgage balance).

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It actually happened in a similar fashion in the US: in 2015, the price of a townhouse nearby was $850k.

Then about 1 year later, the price of it went to $1.5 million.

That's not inflation, that's usually a flip - someone bought a run-down deteriorating property and repaired and renovated it and then resold it at a premium. The 100% appreciation includes quite a bit of money the flipper put into the repairs and the renovation.

Answer 2

If the market works, with 10% inflation, you usually pay 1x% interest on your mortgage.

Since your gain is, according to your assumption, exactly the inflation, you make a loss with this (except for the downpayment).

Note that paying off the mortgage over time, and thus reducing the interest, doesn't change that thought, because it is additional money (e.g. from your income), which you could just invest otherwise, e.g. in government bonds (which usually earn a bit less than inflation) or stocks (which usually earn a but more than inflation, but with a higher risk).

If you secured yourself a low interest loan before the inflation raised (or if your house gains more value than the inflation) - congratulation, you made the right investment decision and you beat the market.

But this is of course not dependent on houses. Since according to your assumption, everything increases its nominal value, you could have bought everything else instead (e.g. gold, wheat, coffee, probably most stocks) and made the same profit - assuming you got a low interest rate loan.

On the other hand, if you got yourself a high interest mortgage and the house prices do not increase enough, or even drop (e.g. during the subprime mortgage crisis, US house prices dropped each year from 2006 to 2011), then you made the wrong investment decision, and the market beat you.

Past performance is no guarantee of future results. That's not only true for everything else. But also for townhouses.

Answer 3

You didn't get any houses for free. You paid for all of them. If the price goes up because of inflation you didn't gain anything, you still have 3 houses worth the same effective value as before.

If the houses increase in price faster than inflation, yes. You made a profit on your investment, but that is true of any investment. Inflation, or the Government printing money had nothing to do with it.

The only real way to make out ahead because of inflation is to outsmart the bankers when borrowing money and get a loan where inflation outpaces what is priced into the loan. In that scenario you pay back the loan with dollars worth less than the ones you borrowed. But as I alluded to, the bank isn't ignorant of this and usually prices it into the interest rate. They are, however, guessing what inflation will do just like you are so you could end up winning or losing.