Benjamin Franklin

Hot off the press!  Be on the look-out for increased sightings of the wildly popular and historically famous Benjamin Franklin. The man may have passed away a long time ago, but his portrait is showing up in ever increasing frequency!  But how? Where?  Look in your wallet!  Well, maybe not YOUR wallet, but certainly the recipients of all the Stimulus money going around.  Now I’m all about using cash injections to get this economy rolling again, but that debt will have to get paid back.  One advantage that the United States has in issuing debt is that it’s denominated in dollars.  That’s right, we borrow dollars from other countries to finance our debt.  Well, the unfair advantage that the US has over any country dealing in dollars is that we get to control the presses (money supply)!  That’s right, depending on our fiscal policy we can increase or decrease the flow of Ben Franklins coming off the press to achieve a wide range of objectives.

The Fed is quite intelligent I believe and would never risk their reputation as fiscal conservatives with a tight grip on our monetary policy.  After all, who would continue to finance our debt spending if we didn’t protect our reputation and demonstrate self-control?  Ok, the fact of the matter is that the Fed will slowly increase the money supply in order to pay off their debt, which will slowly erode the value of the dollar (inflation) which means that the dollar you are holding in your hand today will be worth less than a dollar in your hand a year or two from now.  Your bank account will generally offer a level of interest that is just above the rate of inflation so that while your money is in their care, it’s value is maintained.  What happens when inflation grows at a rate higher than what your savings account will pay you for interest?  And what the heck does this have to do with College Real Estate?

Here is where I’ll tie it all together.  Historically, during inflationary times, people turn to hard assets to protect their wealth (houses, land, or equipment).  The idea is to purchase an asset that will adjust for inflation.  Why does buying a house/condo make the most sense today?  As inflation takes off, the Fed will raise interest rates in order to slow the flow of money.  As rates increase, fewer people will look to purchase homes due to the increased cost of servicing the debt.  Those people will rent.  As the rental market grows, so will the rental rates.  As inflation erodes the value of the dollar, rental rates will adjust to reflect the real market value.  And to top it all off, the money you borrow today will be worth a fraction of that by the time you have paid it off in 30 years!  The reason being, your loan does not adjust for inflation.  So if you borrow $100,000, in 30 years that same amount of cash might be the equivalent of your monthly grocery bill!

Are two better than one?

As with most answers to these types of questions, it’s a big Maybe.  It all depends on the context of the person and the place.  Let’s say that you have approx. $300,000 in financing available.  You or your parent have met with their bank or mortgage consultant and have been pre-qualified based on credit and income.  The conventional next step would be to begin searching for your home or condo that can be acquired for what you have been approved for, right?  However, that’s only one possibility.  Another option might be to instead look for two possibilities that would get you to the same value.

For example, instead of purchasing one home at $300,000 let’s say you bought two condos at $150,000 each.  You might not end up with a home that is as big and nice as you were hoping for, but what do you end up with?

The pros are as follows

First of all, you have spread out your risk base.  Some neighborhoods do better than others and particularly in campus area real estate, some properties pass from being the cool place to live into being yesterday’s news.  Secondly, if you end up renting the property out as an investor, you have also reduced your exposure from a single tenant to multiple tenants.  It will be easier to keep two smaller units occupied than it might be to keep one larger.  Also, if you are unable to find a tenant for one of the two units, you will at least be at 50% occupancy.  With one unit, it’s all or nothing!

There are the cons as well

It will most certainly mean more work as you have doubled your management obligations from one to two properties.  It could double your maintenance calls, with two properties comes two kitchens, two HVAC systems and generally two sets of tenants to keep happy.

If you’re in the market for a campus area property, run the numbers.  You might find that in the end, two ARE better than one!