Just today I received an email from a financial wizard who tells me that we need to start acting on an inflationary economy.  Then I picked up an article that points out we are in a deflationary economy.  Yes says another article, but the government is spending money like water and huge inflation must follow.

Of course goes another pundit, but manufacturers are operating dramtically below capacity and even if the first tiny hint of an increase in orders is starting to show, it is no where near inflationary.  Yes goes the counter argument, but money pouring into stimulating the economy is reving the engine with the parking brake on. Soon as the brake is released, off we go.

It makes sense says another expert but have you noticed interest rates have gone up and are still climbing?  That will kill stimulation of the economy like a spike through the heart.  The bickering goes on and on between the pundits, experts, gurus, geniuses, economists, mathemiticians and no one seems to getting the upper hand.

So now what?  Good question.  For a real estate investor such as me, the long term key is buying real estate with an understanding that both sides may be right. Deflation in the short run but inflation, or at lease moderate inflation for the mid run. 

With this 2 part theory in hand one must buy real estate knowing that there is a good likelyhood of deflation in the next year and that the purchase price must account for that.  If inflation sets in approximately 2 or 3 years from now, hard assets such as real estate are the very best hedges one can have.  Although no one wants to sell low, the sales that are actually occuring are at prices that should offer the buy good protection through a deflationary economy until things normalize.

This was a great plan and could pay off tremendous dividends. Leverage allowed percentage returns into the 3 digit number ranges. Life was good.

Unfortunately things tend to change. Somewhere in the early 2000s prices started to escalate so much that our perfect investor with the perfect plan had trouble finding a property to buy that was priced in a distressed range whether it was distressed or not. So the investor started moving farther and farther from home base.

Suddenly Orange County investors started to find themselves in the middle of San Bernardino. Maybe even the High Desert or worse. Not only that but soon even these returns were in full retreat. Pretty soon the investment with all of it’s risks started paying off like a certificate of deposit. In other words, lousy.

Now the business plan needed to change. Now the cowboy investor had to start figuring that he would need to live with this investment for awhile. Maybe even 5 years. If that was the case, property management became more and more important. Operations were where the money was going to be made.

Admittedly this was pretty tame stuff. Returns could be better than certificate of deposits but they were not going to be like hitting the slot machine bonanaza either.

Today the investor may need to plan on a 6 or 7 year hold and he probably needs to pay attention to tenant retention and deferred maintenance. He needs to become a property manager or hire a good one to keep the cash flow coming and eventually to make that big pop on sale that came so frequently in the good old days. 

In today’s world blind luck has been replaced, once again with good management.  True, blind luck is much more fun to talk about at cocktail parties, but usually management triumphs.  This marketplace has driven us back to the mundane.