Why Invest Today and Not Tomorrow
By Christopher Levarek
Buy land, they aren’t making anymore of it.
– Mark Twain
Often through discussions with investors, we hear concerns about being at the peak of the market and how investing seems too risky today. These are valid concerns and many the investor is waiting on the market to fix itself or holding out for a better option. Today, we aim to provide a few reasons why today is the day to invest in real estate and not tomorrow.
Purchase Power
Almost everyone has heard of inflation or the inflation rate. To recap, the inflation rate is the rate at which the prices of goods and services increase over a period of time. As the cost of prices increase, the buying power of the currency thus decreases.
Since 1913 to the year 2019, we have seen roughly 2493% rise in prices with the dollar experiencing a 3.12% average inflation rate during this period. This means the purchase power of the dollar decreased over this time. (See the CPI Calculator from the Bureau of Labor Statistics for exploring this purchase power over time.)
Ok, so what does this mean for investing? This means, that today’s currency is worth less than yesterday’s currency. We shall demonstrate this idea in the below scenario with dollars:
Scenario 1
Bob invests $100 in a house in 2017.
Bob is happy.
Scenario 2
Bob waits and invests $100 in a house in 2019 as he is worried about the market in 2017
Bob is not as happy as for the same house, his $100 only actually buys him $95.25 dollars of value due to the buying power of the dollar with an average inflation rate of 2.35% between 2017-2019. This means Bob has to spend $104.75 to acquire the same investment value in year 2019.
As demonstrated in this simple example, the inflation rate and lower purchase power of a currency year over year means investing today is better than investing tomorrow as you are taking today’s dollars and making them work today.
Velocity of Money
Is your money working the best way possible for you? In this question, we highlight the idea of what’s called the “velocity of money”. Velocity of money in economics measures the speed at which local currency moves from one purchase or transaction to another. This becomes a major fundamental key to good investing for an investor. We will demonstrate this below:
Scenario 1
Bob invests $30k in an investment property in 2017.
Bob renovates the property and sells the property in 2019 for more then he purchased netting him a 15% return on his $30k. He recoups his $30k during the sale as well.
Bob is happy. He will achieve a 15% return every 24 months on his $30k.
Scenario 2
Bob invests $30k in an investment property in 2017
Bob renovates the property and sells the investment property in 2018 for a 10% return on his $30k. He recoups his $30k during the sale as well
Bob invests $30k on an investment property in 2018
Bob renovates the property and sells the investment property in 2019 for a 10% return on his $30k. He recoups his $30k during the sale as well
Bob is even happier. He will achieve a 20% return every 24 months on his $30k.
In the above scenarios, we are looking at one way in which an investor can see velocity of money in their transactions. The idea is to constantly question whether your money is working the best way possible for you.
Bob is getting a return in both scenarios as he actually did invest however what if he didn’t? What if Bob, in a Scenario 3, decided the market was too hot and prices too inflated and he left his money in a Barclay’s long term savings account gaining 2% per year on average?
As you can see in this case, Scenario 1 is achieving a better velocity of money then this Third scenario. Why, because that $30k is making 4% in 24 months versus 15% in 24 months. As investors, we need to constantly look if our investment money is achieving the best possible return where it is at and if it not, how can we re position the investing funds so it is. This is the idea of velocity of money.
Is that it?
There are a number of reasons why investing today beats out investing tomorrow and we have only highlighted two. Some additional with regards to investing in real estate include:
Natural appreciation of Real Estate year over year
Tax Savings by depreciating real estate offsetting business incomes
Equity in Property increasing by Loan Pay-down through Rental Income
Increased Passive Income through Rental Income
Leveraging market low Finance rates to buy 100% of an investment with only 20% of the value (down payment)
In Final
As demonstrated, Today is when you want to invest in real estate due to the number of factors listed. Waiting for the perfect time will only delay achieving your financial goals and ensure opportunities are missed. As the famous quote goes, “Don’t wait to buy Real Estate, Buy real estate and Wait”. Invest Smart!