“Inflation is coming! Inflation is coming! “
Let’s be honest, friends and readers. Inflation is not coming.
Inflation is there.
Inflation has skyrocketed in the past few months and some say this is just the beginning. The Washington Post also reported on it.
Some of us remember the trauma of inflation in the 1970s and early 1980s. We remember grandparents with fixed incomes whose pension checks – which used to be enough for a two-month mortgage – only covered two weeks. It was painful. And scary. Those of us who remember the gasoline lines and trauma these days assume that inflation is always bad.
Ronald Reagan seemed to think so. He said, “Inflation is as violent as a mugger, as scary as an armed robber and as deadly as a contract killer.”
So inflation always has to be bad, right?
For the uninformed.
But that’s not you. Hold on.
The great economist John Maynard Keynes had some nasty things to say about inflation: “With an ongoing inflationary process, governments can secretly and unobservedly confiscate an important part of their citizens’ wealth. There is no more subtle and secure means of overturning the existing base of society than to corrupt the currency. The process encroaches on all the hidden forces of business law on the side of destruction and does so in a way that one in a million people cannot diagnose. “
Inflation sets in. The value of your dollar goes down. And it is likely that the government is not straight with its consumer price index (CPI) calculations.
Oh, and did you notice that they have printed about 30% or more of all cash that has ever been produced since the COVID-19 outbreak?
Look at the M1 money supply.
Let’s be honest. The news doesn’t look good.
More on BiggerPockets inflation
The good news for real estate investors
You cannot change this situation. You can hate it. You can get annoyed about it. You can curse the dark until the cows come home, but it’s better to light a candle.
As a budding or mature real estate professional (I know, because you’re on BP), you can team up with the two most powerful human forces on the planet to ensure you are successful in whatever happens. In good times or bad. What are these two forces?
Governments and central banks.
How shall we do it?
Well, the US government has massive fixed debt with a very low interest rate. You need a way out. By devaluing the currency, they add to the value of everything that is measured in that currency.
Without harming anyone, you and I can join these powerful forces by doing something similar. While interest rates are still low (which may not last long), we are buying fixed income debt on assets that will appreciate significantly in value as the dollar falls.
This is not rocket science. But following this strategy can pay off more than a NASA engineering gig. (It is the simple things that often create the greatest wealth.)
Fixed Rate Debt During Inflation
Governments and central banks are often run by incredibly greedy people who harm the poor in order to fill their own pockets. Without harming the poor or others, we can join these two powerful forces by wisely using fixed income debt to invest in the appreciation of real assets. And we can get incredibly rich in the process.
Often times, a homeowner’s biggest expense is their mortgage. As a result, many investors think their best game is buying with cash or paying off their mortgage early. But that limits investors to only owning the real estate they can afford to buy with cash.
Especially in a low interest rate environment, property owners can secure their highest expenses by using fixed-rate loans. When inflation rises, rents rise. The income increases accordingly. Other costs increase, but when income increases versus fixed mortgage expenses, profits increase.
And rising profits lead to higher assets, which can lead to the ability to extract tax-free equity on the side, which can afford down payments on more properties. Even if your wealth appears to be growing in nominal terms (only in name, since dollars are worth less), withdrawing your equity can multiply your holdings and thus your nominal and real cash flow.
It is a beautiful thing.
And you don’t need an advanced degree to be able to do this. You don’t need millions of dollars. And you don’t have to quit your job.
As a landlord, you can increase rents to keep up with inflation. Your banker can’t. The growing gap reflects your growing profits. And as I said, raising equity for other projects increases your wealth. Check out this brief analysis from BiggerPockets’ Dave Meyer.
Prepare for a market shift
Change your investment tactics – not just to weather an economic downturn, but to thrive! Accept any recession and never be intimidated by a market shift again Recession-proof real estate investments.
Inflation winners and losers
The same Washington Post story discusses winners and losers in inflationary times:
winner: “The main winner of inflation is anyone who holds debt because it is cheaper to repay it. Land and home owners do not mind either, because their costs usually do not increase that much. After all, governments tend not to bother some inflation because it makes debt appear cheaper. “
loser: “Even companies with fixed contracts suffer great losses because they cannot pass the higher prices on to their customers. Many small businesses have concerns that, for example, it is harder for them to adjust prices. Pensioners and their savings also tend to suffer from the fact that inflation makes their money less worthwhile. You can’t buy that much. “
If your goal is to stay in Dave Ramsey’s benevolence, please ignore this article. It will only irritate him, and he might even unfriend you.
However, if your goal is to create wealth through the safe use of real estate with low-interest fixed-income bonds, this opportunity may be right before you.
“Inflation is here! Inflation is here! “
Bring it on.