Weekly Wisdom #225 - How Can Inflation Help You

Hey, everybody. Welcome to the Weekly Wisdom. I'm Dean Graziosi. If you're new to this site, welcome. This week, actually this morning, I was at the gym with Matt Larson at five o' clock and he said to me, hey, I have an idea for a weekly Wisdom I'd really like to do. And I said, heck, yeah. So I'm introing Matt. Most of you know who he is. If you're new to this site, Matt's one of my top students turned good friend, now does most of my real estate investing with me because we learn so much and get to feed it back to you. So. So he wanted to do a special weekly Wisdom. Here's Matt.

Hi, everybody, this is Matt Larsen. Welcome to the Weekly Wisdom. Hey. I was at the gym with Dean today and I get so many questions about is interest rates going to go up? Is inflation going to get out of control? So I actually wanted to take a minute and just explain to everybody how interest rates and inflation actually work. So I'm going to draw some things out and I think this will help you understand. And the reason why a lot of people ask is they're afraid that they've got a house or they're looking at buying a house, or they own something and interest rates go up and all of a sudden their payment goes out of control and all of a sudden their cash flow disappears. So I want to kind of explain to you guys the whole process behind that. And I think I can draw a few pictures and kind of lay it out so that everybody understands. So as the markets went up, So, for example, what inflation is, is inflation is rising prices. So always look at inflation as prices are going up. So generally speaking, when the market's going up in value, that is inflation. And it's supply and demand a lot of times. And as more and more people are buying houses, the demand diminishes and the supply or the supply diminishes and the demand goes out of control. So inflation happens, so it goes up. So what happens is the government controls the interest rates and the best way to keep inflation under control is to raise interest rates. So what happens is it's not that interest rates go up and then inflation happens. It's actually the opposite. So interest rates are controlled or they use interest rates as a tool to control inflation. So, for example, when in the market in 2000, say 2004 and 05, and maybe through 2006, house prices were going up at the fastest rate they ever had in American history. And that created some inflation. But inflation didn't keep running. What happens was when the market crashed and the market began to fall, we actually saw what I call deflation. So deflation is prices going actually the other way, going down. So the housing market went over the top, it started to fall, prices got cheaper. And if you remember in 2000, we used 2008 through 2010. During that time period, other than, you know, gasoline went up and up in price, but almost everything else went down. Even, you know, even price of just regular goods and services went down. I mean, for example, you know, fewer people going to restaurants, you know, restaurant, you'll saw, you saw all these restaurants doing specials for cheaper food. So even though a lot of people say, you know, inflation's been going crazy, it really hasn't. Even food and some of those everyday clothing, all that stuff went down in cost because we were actually going through deflation. Now what happened was we kind of hit the bottom. I'm going to say in 2011 and through 2011, through part of 2012, it was more or less what I would call 2011 was stagflation. So stagflation means prices weren't going up and, and prices weren't going down. They kind of bottomed out. 2012 last year, I would call that reflation. So now last year prices started to inch back up, goods and services started to inch back up. But it's not out of control. It's at a small percentage, small percentage rate, 2, 3%, maybe less. So we're just reinflating to where it was. Now when it goes back up again, this is again inflation, One of those, and I know there's a lot of other so called gurus out there talking that inflation is going to get out of control. One of the things I want you to use is I always want you guys to think about your own perspective, your own opinion on this stuff. And don't just always believe everything that we say or what other people say. Do your own research and create your own opinion. But I will say this, there's actually a ten year treasury note. The ten year treasury note is where, is basically what treasury notes are being sold for. And if you look right now, I think they're at between 1 and 2%. So what that's saying is what the people that are selling these treasury notes, the government saying is that in 10 years interest rates they're saying are going to be at 1 to 2%. Okay? So in other words, if you look at this 10 year, and I'm not saying this is 100% accurate, I'm just saying this is what the banks use to set interest rates right now. So don't get too over concerned that interest rates are going to go out of control. I'm not saying it's not possible. I'm just saying that all the people that really this is their everyday business bankers are saying, they're saying it's not going to happen by looking at this data right here. Now what happens is as we turn the corner right now, we're right here, the market's on, and especially in housing, the market's on an upward trend. So the prices are starting to rise. It doesn't matter where you go in the United States, this is happening everywhere. So as these prices rise, if they rise past a specific level, you know, someday in the future, let's say in three, four, five years, if prices start to run too heavy, that, that inflation prices, basically once again inflation is prices going up. If it starts to get go too fast, then the government will raise interest rates. Right now, you know, on a, let's say for example, you know, there's a lot of people getting 30 year fixed loans, 3.5% that's basically free money. Investor loans, you know, will range up to say 5%, maybe even as high as 6% in some cases. And you know, this is, you know, the banks are making good money right now at this percentage. So that's why they are what they are. So as this goes up, if it gets started getting out of control, inflation runs first, interest rates run after because the governments will raise interest rates in order to slow the inflation down. So what that means is this, what all of this is boiling down to is this when you're, if interest rates go up and you own property and you're afraid, let's say you have a five year ARM or a five year balloon, meaning that the interest rate is set for five years and it won't change for five years. And let's say you get that loan today because a lot of investor loans or only five years, three to five, maybe seven. So it's 2013, let's say five years from now, 2018, that five year arm or five year balloon comes due. And you're thinking, what if inflation is going crazy and I can't, you know, I go to renew this loan or I have to renew it now and my investment's ruined because interest rates are 20%. Now think about this for a second. First of all, I don't think they'll get that high. I think possibly, you know, it could be 6, 7%, maybe 8% in my opinion. But let's say that that's the case now. It's been running at this point. You get a loan today and it's set out for five years. It's been running at that point multiplied compounded year over year for five years. So your investment has gone up for five years straight at, let's say, 3 to 4%. And in five years, the reason why the government raised rates was to slow it down because prices have been going up. So what that means is every year your rents right now are going up 3, 4, 5% a year every year. And also home values in some areas, it's much higher than that. Right now in Florida, they're hitting 10%. In Arizona last year it was over 20%. So remember, you've got compounded for several years before that happens. So when you renew, if you compound it, and right now you rent out a house for 1,000amonth, and that's compounding for five years. At 5%. In five years from now, this number could be, and I don't have a calculator, but let's say it's 1,500 per month in that rent payment. So that, so the house that you bought, that cash flowed at 1,000, and that's why you bought it. It made sense at 1000amonth. Let's say you're cash flowing $200 a month. In this case, five years from now, you're at 1500. If interest rates go and you've got a loan for 5% and now they're 8, the 3%'s not going to make enough of a difference to throw off your cash flow. You're going to have the same amount. Now, another technique that we do if this happens is a lot of times on these five year ARM loans, you can actually just do a modification. For about 45 bucks, you can do a modification. So let's say on year three, you're three years in and you decided, hey, I know interest rates are rising up. I see it in the news every day. Interest rates are starting to go. And I have these five houses I want to secure myself for five years. You can call your bank and do a modification and extend it out five years. It's a, it's a $45 fee to just do a simple modification. And that's how I do it when I modify a loan. So don't get too concerned with that, but understand that your rents went up $500 a month, and the value at 5% or 10% per year compounding, you paid, you did a good job. We teach to buy below the market. You bought the house for 100,000, let's say, and at the time it was worth, you know, let's say 130,000. Well now this number compounded over five years, it's, you know, 3 to 5 to 8%. Now it might be worth, let's say it's worth 180,000. But you've been paying it down because of debt reduction from 100. Now you owe 90,000. It's worth double what you paid. Another option here, the reason prices are going up is because a lot of people are buying houses. You could sell that house at that point, not remodify and just cash out and double your. And literally you owe 90,000 by this point. Sell it for 180 and you just made a huge profit. So those are some of the strategies that we use as professional investors. We understand. We use inflation to our. That's a tool. It's actually something we use to our advantage. You make money from inflation because prices are going up. You do a good job of buying it low, your cash flow actually increases. So one of the main things to remember is that the best hedge against inflation is owning real property. So if you go back into history and look when inflation started to run most of the time, if not all of the time, the things that were protected the most from inflation were actually houses, real property. So that's the other benefit here. If inflation does run, the worst thing you can do is have your, your assets in cash, because those cash inflation is actually diminishing the value of that cash. So they're. The best place to be is in real estate. Anyway, I hope that made a lot of sense for everybody out there. I know it was a little bit longer of a video, but I wanted to go through all these details. Hopefully that answers a lot of questions. And finally, one last thing. There's a click the button below. Dean had a. Had a. The media contacted Dean and asked for his students, for all of you guys out there to fill out a survey. So they actually contacted him. They wanted his students to fill out a survey. Click below, fill out the survey and we'll send it in. So anyway, I hope this makes sense. We'll talk to you guys next time.