The Benefits of Trust Deed Investing During Inflationary Periods
The financial environment in the United States has undeniably shifted over the past year. The term ‘inflation’ has become commonplace in our conversations, reflecting its pervasive impact on every facet of our daily lives. The effects of inflation are evident everywhere, from escalating grocery bills and variable fuel costs to sky-high airfare.
In reaction to these surging costs, interest rates have climbed, placing some capital markets in precarious situations. However, a number of real estate investors have found this to be an opportune moment to pivot towards trust deed investments. Continue reading to learn why investing in trust deeds is a savvy move during periods of inflation.
What is inflation?
Inflation is a term used to describe the general increase in prices of goods and services in an economy over time. It essentially means that the purchasing power of money decreases, as the same amount of currency can buy fewer goods or services.
Inflation occurs when there is an imbalance between the supply and demand of money and goods. Some of the main causes of inflation include:
- Demand-pull inflation: This occurs when there is excessive demand for goods and services compared to the available supply. When demand outpaces supply, businesses may increase prices to maximize their profits.
- Cost-push inflation: This type of inflation is driven by an increase in production costs, such as raw materials, wages, or taxes. When businesses face higher costs, they may pass them on to consumers through higher prices.
- Monetary inflation: It occurs when there is an increase in the money supply within an economy. When more money is available, people have more purchasing power, leading to increased demand and potential price increases.
Inflation is typically measured using various indices, such as the Consumer Price Index (CPI) or the Producer Price Index (PPI), which track the changes in the prices of a basket of goods and services over time. Central banks and governments closely monitor inflation rates and aim to maintain a stable and manageable level of inflation to promote economic growth and stability.
What Causes Inflation in 2023
- Pandemic-related economic dislocation: The economic disruption caused by the COVID-19 pandemic resulted in supply chain problems and fiscal and monetary stimuli provided by governments and central banks around the world in 2020 and 2021.
- Supply shortages: The recovery in demand through 2021 led to broad and historic supply shortages, including chip and energy shortages. These were influenced by increasing consumer demand and affected construction sectors worldwide.
- Effects of the Russian invasion of Ukraine: The Russian invasion of Ukraine in early 2022 affected global prices for oil, natural gas, fertilizer, and food, which exacerbated inflation. Higher gasoline prices, in particular, were a major contributor to inflation, as oil producers saw record profits.
- Shift in consumer spending: After the COVID-19 recession, consumers shifted their spending towards goods and away from services, particularly in the United States. This shift placed stress on supply chains, such that the supply of goods could not meet demand, resulting in price increases.
- Food and energy prices: In 2023, the International Monetary Fund noted that food and energy were the main drivers of inflation, with rising prices squeezing living standards not only in North America but worldwide.
- Increase in the money supply: One theory suggests that the large increase in the money supply in the early months of the pandemic contributed to the uptick in inflation in the U.S. The M2 money supply, a broad measure of the amount of money in the economy, grew at a record monthly rate of between 22% and 31% during this period.
Trust deed investing can be a smart strategy during times of inflation for several reasons:
- Hedge Against Inflation: Trust deeds, or deeds of trust, are secured by real estate. Real estate is often considered a good hedge against inflation because property values and the income from properties (rent) tend to increase over time. When inflation rises, rent and property values often rise in response, potentially protecting the investor’s purchasing power.
- Fixed Interest Rates: Trust deeds typically have fixed interest rates. This means that the income stream from a trust deed investment can remain constant over time, regardless of inflation. While the real value of this income stream can be eroded by inflation, the nominal value (the actual amount of money received) remains the same.
- Short-Term Investment Horizon: Trust deeds are often short-term investments, with terms typically ranging from 1 to 5 years. This can be an advantage during periods of inflation because the investor’s money is not tied up for long periods. This allows for adjustments to be made as economic conditions change.
- LTV Ratios: The Loan-to-Value (LTV) ratio in trust deed investments is usually quite conservative, often capped at around 65% to 70%. This provides a cushion if the value of the underlying property decreases, providing some protection against the risks associated with inflation and market fluctuations.
- Priority of Claim: In case of borrower’s default, a trust deed investor is usually the first one to receive their share from the sale of the property since they hold the first lien position. This first claim on the asset adds an extra layer of security to the investment.
It’s important to note that while trust deed investing can be a viable strategy during times of inflation, it’s not without risk. As with any investment, potential investors should conduct thorough due diligence and consider seeking advice from financial professionals. At Coastal Capital, we offer not just stellar returns, but also unparalleled peace of mind with an impeccable record of zero loss since inception.
Call (310) 280-9173 to learn more.