Major Investing Risks: Taxes and Inflation
RBS Homes: Passive Investing for Aggressive Returns
Taxes and inflation, two of the most voracious investment vampires, can suck the life out of almost any good investment. As a tag team they are especially vicious. Inflation robs purchasing power while simultaneously pushing the weaker dollars into higher tax brackets, where taxes steal even more of those crippled dollars. The critical questions for a long-term investor:
What are your expectations of inflation and taxes over the next decade?
What investments will protect your money from these two investment vampires?
We will return to these two questions at the close of this article, after exploring the current trajectories of taxes and inflation.
Executive Summary
Federal spending is exploding. Federal spending has increased to 26% of GDP, the largest since World War II. The historical average has been 18% of GDP since World War II. In the past 18 months, the deficit has increased by almost 50% relative to GDP—from 18% to 26%. The annual Federal deficit, usually 0-3% of GDP, has grown correspondingly, to 11% of GDP. This is dangerous territory, comparable to the deficit of Spain.
Tax rates will likely increase. Hard to believe, but Federal tax rates are at a historical low of 34%, the second-lowest in the past 50 years. With deficits exploding and the George Bush tax cuts expiring at the end of the year, tax rates will increase in 2011. The historical average has been closer to 50%, so be prepared for a significant increase.
Inflation will likely increase. Inflation is hovering near its historical average of 3.41%. Inflation tends to track the Federal deficit and the money supply. In the past year, the Federal Reserve has increased the money supply from $750 billion to over $2.1 trillion, a 200% jump in less than a year. Expect inflation to increase correspondingly over the next 24-36 months.
Income Property—15%+ Annual Cash Return, Growth Above Inflation, and Tax Benefits
Selected income properties—specifically single-family, detached homes in upscale neighborhoods in Houston—can produce current income up to 15% annually or more, as shown in the example on page 6. Values of these properties have increased faster than inflation for the past twenty years. Income property offers numerous tax advantages, including depreciation, 1031 tax –deferred exchanges, and the possibility for total tax elimination through self-directed Roth retirement accounts.
To protect your retirement assets against rising taxes and inflation, consider income property as one element of your investment portfolio.
Single family homes in Houston outperform the S & P 500 Index. Better Return, More Stability, Peace of Mind.
The past twenty years have included two extremes for the S & P 500 Index. The 1990's was one of the best decades, while the 2000's was one of the worst decades. High volatility causes high anxiety and leads to emotional buy/sell decisions, which expose your money to the twin vampires of taxes and inflation. Single family residences in Houston have provided high cash flow, high appreciation, and low volatility. You get a secure retirement and the peace of mind to enjoy it.
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2010-03-08 
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