1257: Inflation Induced Debt Destruction in a Low Inflation Environment

Well, you're going to laugh, but because of your podcast, we're positioned well. I don't know how else to thank you, but thank you. Your podcast and your services are amazing and I wish I could do more as far as working with you guys, but I haven't really. But maybe in the future, obviously. But once again, our family is grateful to you and your services and your information is priceless. Thank you so much.

Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants and and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your Financial Independence Day. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors.

Welcome to episode 1257. 1257. I hope everybody had an awesome weekend. It is Monday, one of my favorite days of the week. I know that sounds strange, but when you are on your mission, you look forward to Mondays. I hope that Mondays are good for all of you. I know some of you are dying to leave the rat race and get.

Out of your job.

And that's what we're here to help you with so you can be on your mission. If you love real estate and you love income property and you have an interest in it as more than just the road to financial freedom, as more than just a vehicle to get you there, then hey, you'll look forward to Mondays as you build your wealth by following our plan. The plan that we have outlined on this show over the past 14 years or so. If you don't love income property, but you simply look at it as the vehicle to financial freedom, then hey, you will be doing whatever your passion is and your income property will be working mostly in the background, requiring just a little bit of attention while your tenants toil away and give you and your portfolio 33 to 40% of their hard earned income every month. What other company gathers that much of someone's income? What other business is gathers 33 to 40% of someone's income every single month? Only income property can say that, right? Only income property. You know, it's, it's almost like you have a bunch of indentured servants working for you 33 to 40% of the time every month. Your tenants work somewhere between 10 and about 14 days. They work for you. Congratulations. That's quite a wealth builder, isn't it? Anyway, today we will have a little live clip from our recent Meet the Masters of Income Property event that we held in Newport Beach, California a couple of months ago. And the reason I'm playing this is even for those of you who attended that event, here's what happens. It happens every time at Meet the Masters and I kind of love it and I kind of hate it at the same time. I'll just tell you, it's something I do not want to discourage. But as a presenter, it bugs me just a little. So here's what happens. By Sunday afternoon, a lot of you are out of the room. You're outside, you're in the exhibit area and you're talking with our local market specialists and our financing providers and you are buying properties. Now I love that because that's business and we always welcome business. We're capitalist over here. But you're not in the room to hear what I'm talking about. The room, literally, sometimes 40% of you are outside making deals and buying properties. And hey, I don't want to discourage that. But as a presenter, it gets a little lonely when you see some empty seats in the room. Saturday and Sunday morning the room is full. And so we are going to play some clips here over the next several episodes from Sunday afternoon when some of you had bugged out and you were out buying properties. So we'll do that here in just a moment. And I'm happy to announce that of course we have our cruise event coming up and you all know about that already. Jasonhartman.com Cruise we got a few more people that just signed up and are joining us. And I do want to mention that I have heard a couple of people express reservations. Now, I have been on 10 cruises in my life and I've been on a couple that I didn't like very much. And the ones I didn't like very much were those short, I think I went on two of these were those short Mexico cruises, leaving out of Southern California and going to Mexico for like.

Three or four days.

Those have the tacky cruise ships and honestly, they have the tacky crowd. Yep. I think that crowd is a bit tacky because they're these super low budget, crappy cruises. This is not one of those. This is a Princess Cruise. It's A seven day cruise. It's a high class cruise, you'll like it. But here's the other thing I heard a couple of people asked me, what about the Internet? And hey, I'll tell you, that's a big deal for me. I like to be connected. In fact, I like to be connected all the time. Some people say, don't you just want to unplug? No, I don't. I don't like unplugging at all. I want to be connected to this universal mind of humanity where I've got billions of people contributing knowledge. And when I want to look something up quickly or I want to learn about something, or I want to visit a website someone tells me about, I want to go right then. Well, thankfully I selected this cruise, our Canada and New England cruise coming up in October because it has the fastest Internet at sea. And it's not expensive either. It's called Medallion class Internet and it rivals high speed landline connections or at least that's what they tell us at Princess Cruises. And it says so right on the website. And I kind of doubt a big company like Princess's false advertising. They retrofitted certain Medallion class cruise ships in their fleet to this new high speed Internet. And it's inexpensive and it's fast and it's all over the ship, so you can get it anywhere. And they retrofitted several of their ships just about a year or a year and a half ago, I think they said, to this Medallion class and that is very special. Fastest Internet at sea they say, and I think you'll really like that. So if you're thinking I gotta take time off, I gotta be disconnected. No, you'll be connected on the ship. You can get stuff done. That's what I love. And of course we'll be spending time at some ports and you'll have the opportunity for coffee shops or whatever there as well. So don't worry about that. You will be connected. And that is one of the big features that I personally look for in the cruise. But what's the other event? We got something else coming up. Well, we are doing profits in paradise in beautiful Orlando, Florida. Yes, the home of Epcot center and Disney World. And that is coming up. We are waiting for the contract back for our October dates right after our cruise. Going in and out of New York for the cruise. Then you can just jet right down to Orlando and come to profits in Paradise. Or if you're not going on the cruise, you can just come to Prophets in Paradise. And it is going to Be a great one this year. I'm about to announce a big famous speaker who will be giving two presentations at the event. And I think you'll really like that. So that's all coming up, but without further ado, let's go to a live clip from Sunday afternoon at Meet the Masters.

I want to talk to you about sort of two more main subjects as we wrap up the day. So, you know, in my investing strategy, if you could put the PowerPoints on the screen, I talk a lot about inflation, of course, and how significant that is as an investing strategy. And you've heard me many times refer.

To inflation induced debt destruction.

You know, I, I give this example where I show you the inflation that really happened, that affected millions of homeowners and exactly what it did for them from the period of 1971 to 2001.

Or 1972 to 2001.

Okay? So I thought, you know, we really need to update this example. And the example doesn't work as well because the inflation rate, I mean, it's certainly been more manipulated, but I think it's hard to say that it hasn't been lower.

I do believe inflation has been lower.

Than it was during that 30 year period. But, you know, if you count asset inflation, I think it's actually probably been higher. And you know, it's weird that in our world inflation is only measured by consumer prices, the consumer price index, the cpi. Right? Because there's another very significant form of inflation, and that's asset price inflation. But that's not measured at all, except to the extent that it affects your.

Housing, cost of your personal house.

But that asset inflation, and you know, this is a theory I've talked about over the years. I think it really has a giant.

Impact on the course of someone's life.

And in life, a lot of things can be related to the metaphor of the telescope. So if you have a telescope and you know, all of you have looked.

Through a telescope at some time in your life, probably at the moon, right? Have you all done this? You know, at least when you were a kid you did this, right?

Pay attention. Come on. I know it's late. Help the speaker out. Participate a little. Okay, so when you look at the moon through the telescope, what happens when you just accidentally bump the telescope? Just a tiny little couple of millimeters or a centimeter, Right. You know, half an inch. A half an inch bump in that telescope will throw you way out into interstellar space, right?

You won't see the moon anymore. Now, the moon's only 250,000 miles away only. And you know, the earth is 25,000 miles around, so there's how far the moon is just for a point of reference.

But you know, you knock that telescope off just a tiny bit and it changes the whole course. And the same is true of our life. You know, a lot of people that.

Are sort of the wannabe successful people.

They like to think that successful people had a lucky break or they had some big event happen, some miraculous thing.

You know, happened and it changed the.

Course of their life. It was like one event, one big event.

You know, winning the lottery, getting the promotion, some lucky break, right? And all of us real people know that this just isn't the way it works, right? Probably seen that thing passed around on social media. That is a little pencil drawing with a graph with the axis here and the axis here, and it's this graph and it says the path to success.

You've seen this on social media and.

The line starts going like this and then it goes, you know, like that. And then, oh, success.

You know, it's a lot of twists.

And turns and it's a lot of really just hard work. That's the reality of it. It's not glamorous at all. And that's what makes for success in real life.

But a few key decisions can really set you on the course, especially when you have something else that isn't really directly dependent on you or your own efforts. Okay, now you've heard me say many times, I believe that the idea of.

Passive income is complete bull, okay? I don't think it exists. Cussing, right?

Have you heard of Gary Vaynerchuk?

You've probably heard of him. He cusses a lot, okay? He's a famous motivational guy, right?

And he did this video, just this rant on all these people. And he's sort of in the Internet marketing world. And in this Internet marketing world, there's.

A lot of people who talk about passive income and sell passive income. Oh, just create this website and you'll have passive income. Oh, bs, you know, I mean, Tim Ferriss, right? The four hour work week. He had the book up there, although we didn't talk about it.

You know, an impactful book.

I had dinner with Tim Ferriss just a little over a year ago in Austin. It was a four hour dinner, I kid you not.

We had a four hour dinner and.

Pat Donahoe went with me, who spoke yesterday. And I don't know if Pat's here still. And then Ryan Moran went as well.

And so we had this four hour.

Dinner with Tim Ferriss, I bought it at a charity auction. And so he and his girlfriend took us out to dinner. It was a four hour dinner and a one hour dessert. So it was a five hour dinner, but we went to dessert at a different place.

But you know, Tim Ferriss doesn't work.

Four hours a week, okay?

It's just, look at it.

There's marketing and there's reality, right?

But when the thing sort of works without us and without our own efforts, you know, Earl Nightingale many years ago likened it to a cruise ship.

And he said, look it, you know, a cruise ship and you're all going on a couple of cruises coming up in the next year. So, you know, because you're going with.

Me, so we're all coming together. So, you know, the cruise ship only goes maybe 20 knots, you know, give.

Or take 20 miles an hour, right?

And it goes very slowly in an airplane. You get on an airplane and it goes 550 miles an hour, but the cruise ship just keeps going. It's so persistent. It just goes 24 hours a day. You sleep on the cruise ship, you party on the cruise ship, you eat, you sit out on the deck and get a suntan. And you know, it's just moving all the time, it's moving and there's this progression that is always happening in a positive direction. And before you know it, you're in a new port, right? Before you know it, you're in Cuba with us, okay? Or you're in, you know, Mazatlan or whatever, right? And so it's a very consistent thing. And the reality is successful people are.

Just very, very consistent, okay?

And they don't let setbacks take them out of the game because life is.

Really a game of staying power.

And the beautiful thing about income, property is it has all these multi dimensional.

Characteristics that we all know and love because we've been talking about them for years.

And it's just always working. It's like that cruise ship, you know, when I started yesterday and I talked to you about ROA return on amortization, we talked about how that's just working and working and working. And it doesn't do much in the beginning, but you get five years in, it does more, you get 10 years.

In, it does a lot more.

And 15 years, it's doing a lot for you, okay? It's making a big difference in addition to all of the other ways in which you earn a great return on your investment. And it's all happening kind of like just automatically like the cruise ship, it's just moving all the time.

Right?

And inflation is working in our favor.

All the time, yet it's hurting everybody else who isn't playing our game all the time. So for better or worse, it's nice to say, well, the pie is big enough for everybody.

AOC would say, oh, we just tax the rich.

And Elizabeth Warren would say the same thing. And the pie is big enough.

The reality is, yes, capitalism is a great concept and it does make the pie bigger.

There's no question about it. The pie gets bigger. I mean, George Gilder's concept of knowledge.

And how it creates wealth. And he says, look, I mean, I don't know if you really caught it.

What he said yesterday. Right? And maybe he said it today again.

But he said every resource we have today on this earth was available to people living in caves.

They had all the same resources. Arguably, they had more resources than we do now because the environment hadn't been destroyed yet.

Right?

Okay, so the same resources were there, but what made the difference? Well, this consistent progression forward of humans to learn and impact and change their.

Environment and make it better.

Every decision we make, I would argue.

Every decision we make is a decision.

To improve our condition.

That's the nature of humanity, to improve our condition. Every decision.

So growing the pie. So economics is a relative thing, okay? And you know, during the Great Recession when things looked really bleak and really.

Bad and everybody was worried that, well.

You know, everybody's going to end up broke, the world is coming to an end. And I don't know, you know, try and remember how really devastating and bad the News was in 2008.

You know, 11 years ago, it really did seem like the world was ending. I mean, think of it.

The country of Iceland went bankrupt.

A country, okay, literally became insolvent. Okay?

It was a giant thing. So the economic pie is relative. And regardless of how wealthy any of us become, it is a relative gain. So all we have to do is be ahead of most others.

You know, like that old story of the bear in the woods and the bears coming at the two hikers and one stops to put on his tennis shoes and you know, the other one.

Says, you can't outrun a bear, man. A bear can run 30 miles an hour.

He says, I don't have to outrun.

The bear, I just have to outrun you.

And then I know you've heard it's trite story, right?

But it's true. That is true. So even if nothing on the pro.

Forma comes true and it's never as good as we expect.

All we have to really know is that we are outperforming how most people invest and we're getting ahead.

Okay.

You know, even. I mean, you've heard me say many times that Bernie Madoff's big promise was I can make you 8 to 12%.

Consistently in my Ponzi scheme. Well, he didn't say that. That came out later.

But that was considered phenomenal performance.

Okay.

And you look at any of the performers on our website, because income property.

Is so multidimensional and has these great characteristics.

You look at any property on that website and I doubt there's any property there that has a pro forma return of less than 25% annually. So even if it only works out half as well, okay, you're going to make 12.5% because it's got so many.

Advantages that other investments don't have the multidimensional characteristics.

And remember, on that first year pro forma, it only counts the first year's ROA or return on amortization. It's not showing you you're 5 or.

Your 7 or your 10 or your.

15 when it really starts to chunk.

Away, like I showed you on the graph yesterday.

So it's not showing that. And it's also not showing iidd what is iidd? Most of you know, right? What is it? Inflation induced debt destruction, The Holy Grail, the thing that's hidden under the iceberg. So when we look at the last 30 years, 2018, back to 1989, let's just take a look at this. And this is way less impressive than.

The other example I've given for many years. And that other example coming from Dan Ammerman.

So during the 1989 World Series, I.

Don'T know if you remember, there was an earthquake, remember?

And it damaged the stadium.

And that was kind of like a really big deal.

Okay. In 1999, they released this movie with.

The worst actor in history, Keanu Reeves. Okay? I mean, that guy sucks. He's worse than Oprah. Oh, my God. I don't know why this movie ever became a big deal. I never got into it. But, you know, I could stand up here and say, did you take the blue pill or the red pill? Isn't that how it works? Or whatever the difference is anyway, so.

You know, that movie was like a big deal. Why is that such a big deal?

Why?

He's not a good actor. Why is the Matrix a good movie? Please tell me, because I don't get it. Okay, go.

It Used a new technology to kind of circumvent the actor from all different angles.

Okay.

And that was brand new. And another thing is that it kind of opened people's minds to this idea that there could be something else bigger than what we see in our.

And that's definitely true.

Yeah, you know, now that you mentioned.

That, that's another good point. How much time do we have?

We have time, okay? So that's another good point because, you know, we don't see so much that.

Is going on in the world.

And think about it, you know, I always say watch old movies and watch old TV shows.

To gain a perspective, you must gain a perspective.

And this is like, you know, you've.

All dealt with and maybe you were this person. I probably was too. The young know it all, okay? You know, who knows everything but has like no experience and no points of reference, but they know everything. They're usually a teenager.

They just don't see it. You've got to watch old stuff to.

Just remind yourself of how it used.

To be because it's so easy to forget that perspective. But think about it. You know, Carmen will tell you I have a crush on Audrey Hepburn.

Yeah. I usually have a crush on dead women.

So.

Anyway, yeah, there she goes, look at her.

I say, you gotta see Breakfast at Tiffany's. It's such a good movie, right? And so think about it. Back in 1964, whenever that movie was made, what I think it was 60.

60.

Apparently you're a fan too.

But you know, if you said, hey, in the future we're gonna have this.

Little computer in our pocket that does all these things.

This does, right.

And this little computer will be hundred.

Times more powerful than all the computers.

NASA would have nine years later when we landed on the moon. If we really did, it might be a conspiracy, but who knows?

That would have seemed like magic to them, right? That would have been magic. I mean, it's like. And think about all the things that we think we know now that in the future, in 10 years and 20 years, we're going to think whatever the future brings, it's going to be like magic. We can't even imagine what we're going to see yet. Right? We can't even imagine. We don't know. So we go forward 10 years at.

A time over this 30 year example, right? 1989, 1999, the movies aren't getting any better.

2009, Michael Jackson passes away and you.

Know, you can't see anything on the news except that.

And so, you know, that Just gives you a point of reference over the.

Last 30 years, and most of you were there.

And if we look at inflation induced debt destruction, how did that play out.

Over the last 30 years?

Now again, this is not a theory, it's a fact. And it happened to tens of millions of people. This is not some esoteric concept that you hear about from some liberal left wing professor in an ivory tower. This actually happened to people. And here's what happened.

Here's the old example I'll just go through real quickly. You've all seen this.

Probably you buy the average house in 1972 for $18,000. I'm looking up in the green part at the top. You get an 80% mortgage for $14,000 and change the interest rate back then in 1972 was 7.37%. You borrow that money for 30 years. First row there, you know, unfortunately, with.

These bright, awesome, beautiful screens that are magic, the laser pointers don't work because they're so bright, you can't see it on there.

But you know, just going over here to this first row, 1972, that's the inflation rate.

A dollar is worth a dollar.

And these are the annual payments on.

This $18,000 house or $14,000 mortgage.

These are the inflation adjusted real payments.

What you're really paying in real dollars.

And that's the monthly payment. And let's not worry about this, okay? So you go forward 12 years to 1984, and now this $1972 is only worth 40 cents.

Okay?

It's only 40 cents in real value. You're still writing a check all along for the same amount every year, which is basically 101 per month times 12.

Months of the year. Close enough for government work.

But the value of that dollar keeps declining because of inflation. So you are now paying less both in monthly payment and the mortgage balance is being decreased by inflation.

That's inflation induced debt destruction.

Okay, so then if we just go to the end of that term and we see that by the time that mortgage is paid off, the average inflation rate is 5.1% over that 30 year period.

Okay?

The $1972 is now worth 24 cents.

Because inflation has diminished the value of the dollar.

You're still writing that last set of checks for $1,211 per year. Okay? The monthly amount used to, you're still writing the check for $101 per month, but the real value of it's only $24.

Okay, because inflation has diminished the value of it.

Right, Coco, get away from that food.

That's right.

Okay, but what really happened to these people, two millions of people, not a theory at all, is they thought they borrowed $14,614. By the time you added interest, they actually paid back in nominal dollars, in name only, 36,318. And in real dollars, after inflation diminished the value of their debt.

Right.

They paid back 16,393. And after tax benefits, they paid back 12,655. Okay, so that means that they thought they were borrowing the money at 7.37%. And after inflation, they were really only paying an effective interest rate of 1.06%. And after tax benefits, they got paid.

1.16% to borrow the money.

And they also lived there for three.

Decades for free, minus maintenance and Gardner and home improvements.

Okay, so they got paid to borrow the money.

So we all know that example.

But you know, you're going to say, well, during the 70s, the late 70s.

Because Jimmy Carter was a disastrous president who probably meant well, but he sucked as a leader. He's about as overrated as Oprah.

So there was a lot of inflation.

During the late 70s, right? In the early 80s, till it got under control a little bit.

So what if the inflation rate is lower? Well, let's look at 1989-2018. The inflation rate was only 2.6%. So what did that do to the payment? Well, on a typical house that you might buy through our network, your mortgage.

Payments might be around $10,400 per year. That's that top blue line.

Okay, but adjusted for inflation, those payments.

Were reduced to $5,143 per year in real dollars. See, you write the checks for nominal dollars. Nominal just means in name only. That's what the word means in name only. The name of it. Right.

Is the same, but the value of.

It is different than the name. The value keeps changing. That's a moving target.

So that's what happens when the inflation rate is only 2.6%.

Remember the other example? Inflation rate was 5.1%.

So it's just about half. It's a lot lower, but it still makes you pretty rich. Okay, so take a look at this one. So this shows you the rent, the projected rent versus the mortgage payment. Okay, so at the beginning. Now, this is a property that isn't that good. It's not terrible. I might still buy it, but it's not that great either. It's got a 0.7 rent to value ratio. And what I mean by that, of course, is that, you know, instead of renting for the ideal point or 1%.

Rent to value ratio, meaning if the house is $100,000, it would rent for $1,000 per month.

It rents for only $700 per month. Now, if you bought a property anywhere on the west coast of the United States, you know, you could only get 3 to 5%.

Okay, so this is not that good property, right? It doesn't perform that well. And that's why I use it as.

An example, because even if it isn't that great, it still does. Okay, in the first, what's that, four.

Or five years, right.

You've got a mortgage of $10,400 and you've got negative cash flow. But as your rents increase at only 3% per year, and you all know.

I tell you that the ideal is try and get 4% per year rent increases.

But you can't always do it.

Why not?

Because it depends on the overall marketplace.

It depends on how much rental competition there is in a marketplace. It depends on the overall inflation rate.

It depends on how low the interest rates are. Because when interest rates are low, you.

Can'T jack up the rents very much.

When interest rates are high, you can really push up the rents because tenants.

Don'T have an option of buying, okay? They're going to be forced to stay in the renter pool, right?

So over the course of that 30 years, look what happens. Your mortgage stays consistent, assuming you don't.

Refinance it, which you may well do, but it's consistent.

So that's that middle line where the green looks different, right? It's just straight across. And then the rent is $21,844 per.

Year at the end of that 30 year period. But you've locked in that cost of borrowing, the cost of that debt. So. And then the cost of that debt is of course being diminished by inflation, as you saw, right?

So you think in 2018, in this example, at the end of the chart, right, where the two greens intersect, right, straight across, you think you're paying $10,400.

Per year in your mortgage, but you're really only paying $5,143 because inflation diminishes the value of the debt. So look at the delta. What's the Delta? Right.

It's 5,100 real dollars versus 21,844 in rental income. And this isn't all of the characteristics, it's just a couple of them.

So income, property is the greatest thing ever. And here's what happens with the house price. Okay, hang on a second.

The house price in 1989 is the.

Median price, according to the Fred website, 120,000 and change.

You put $24,000 down, and now you're controlling an asset at the end of.

That 30 years of $321,000. Okay. Because of the value of leverage.

Now, on that last example, we didn't adjust the rent for inflation. So what if you adjust the rent for inflation, right. But you sort of can't. And here's why. Because you didn't get that rent in the beginning. You only got it over time as.

The rent went up.

But if you wanted to, I guess you could easily do the same thing.

To the rent that you did to the mortgage payment.

So the mortgage payment is in real dollars, 51.43.

So it's about half, right? Is that about the number? About half? Almost exactly.

So now just take the rent and.

Cut it in half. Okay, so it's, you know, $11,000, give or take.

Right. But that doesn't include tax benefits. And this chart appreciation doesn't include a whole bunch of things.

Doesn't include the positive cash flow you got throughout the years or anything like that.

So that is why income property is.

The most historically proven asset class in the entire world. That, among many other things.

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