Capitalism 2 and Capitalism Lab Forum

When you play with inflation on, leveraged real estate investing becomes a lot more lucrative.

This is because after you set up real estate, after occupancy scales, you will typically earn about a 10% initial return, in both the inflation and no-inflation versions. This is often approximately the same, or slightly above, the cost of borrowing.

However, your rents will go up over time in line with both growth in the economy, and also especially, with inflation, whereas nominal interest rates are typically no different when inflation is on or off.

If inflation averages say 5%, and growth in the economy say 3%, your rents will go up at 8% a year. That means your total return on investment will be about 18% (10% yield, and 8% capital & rental growth over time), significantly higher than borrowing costs.

So you want to borrow as much money as possible and invest in real estate in this manner. Inflation will erode the real value (inflation adjusted) of your debt over time, whereas the real value of your properties will rise. Additional advantages are that the income/cash flow stream is extremely reliable and is far less vulnerable to aggressive competition from competitors than other industries.

If you are tapped out of cash, if your stock is trading at say 3x book, you can also issue new shares; slow the game right down, use the extra cash to heavily borrow the maximum possible, and then buy back some or all of the equity you just issued on market (or you can just enjoy the higher book value per share, but if you do this too many times you risk losing control). This can supercharge your level of leverage and returns on equity.

If you play the game with 7 cities, and buy residential and commercial real estate any time the demand & supply balance is about 10 or below, using a lot of debt, you will make an absolute tonne of money over time just reinvesting in real estate, with minimal risk. I have built a business with tens of billions in market cap just investing in real estate.

Another variant it to invest in real estate in the survival mode. It becomes profitable relatively early. Many of your competitors will struggle - some will go bankrupt, and be capacity constrained. If you survive off your real estate rental income, you can reinvest the income into retail & manufacturing etc when the city scales up with minimal competition, and crush it.

It's not a very challenging choice of strategy, but it's highly lucrative.

J.F.C. ! this is some Donald Trump strategy right here

Question: is this a legit strategy or exploit ? Like, developers forgot to apply inflation to the value of land/buildings, or is it close to the "real life" ?

Kudos for the post anyway.

Nominal interest rates are largely the same whether inflation is on or off, which means real interest rates are much lower when inflation is on. This is an exploit you can take advantage of with real estate. R/E investing is much less lucrative when inflation is off as real interest rates are relatively high and in many cases not much lower than rental yields.

Cheers,
LT

Good observation, but this extends beyond real estate to include pretty much every type of leveraged business.

LT3001 wrote: Tue Mar 12, 2019 6:24 am If inflation averages say 5%, and growth in the economy say 3%, your rents will go up at 8% a year. That means your total return on investment will be about 18% (10% yield, and 8% capital & rental growth over time), significantly higher than borrowing costs.
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It's not a very challenging choice of strategy, but it's highly lucrative.

This is certainly a safer strategy, but there are other investments well above 100% annual ROI in the game for those wanting to risk more or look for highly targeted investments.