432: Protecting Your Savings from Inflation: Proven Strategies for Savvy Investors

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It is my pleasure to welcome a returning guest back to the show and that is none other than one of your favorite investment counselors. And that is Sarah, who has been with us for a long, long and she is here to share some of her wisdom today as we take some of your questions. Sarah, welcome back.

Hey, thanks for having me back. It has been a while.

It's been a minute. As I love how the millennials say it's been a minute. I think that's like their don't forget.

I'm a millennial technically.

I know you are, but I identify.

As a Gen Xer.

Yeah, you identify as the older generation than you and I do the same. I identify as a baby boomer even though I'm a Gen Xer.

Yeah, good stuff. Okay, well, hey, let's start off with some questions. Now we're going to cover some other stuff because we've got a few things we want to talk to you about. But let's just dig into some of these listener questions. If you've got any questions, you can always go to jasonhartman.com ask and leave questions or comments and suggestions or whatever you want right there@jasonhartman.com Ask Sarah, what do we have first?

Yeah, so the first question I want to hit on is from Katie and it says we recently sold our home and have a lot of equity. We are having a very hard time qualifying now with several different lenders. I'm self employed and show a recent loss. Otherwise we have great scores. That'd be great credit scores, I'm assuming, and mortgage history. We are trying to move from California to Arizona, surprise surprise, and now are faced with renting and waiting until we can qualify or buying with cash and refinancing in six months. The goal is to get into a long term fixed rate mortgage with using your strategy. What would you do? Help?

Yeah, yeah, absolutely. Well, Katie brings up a good point and some of these questions are kind of some vintage questions. You know, they are timeless. So we're featuring some of those as well. Lenders do not like self employed borrowers. It is hard to qualify when you're self employed because of course you're taking every tax deduction you can and you know, you might even show a low income or even a loss on your tax return when you're making enough money. Obviously you know, most of the time to get by. But because of the way our tax code works and it's pretty dysfunctional, that's just the way it is. Now isn't it interesting that with these government sponsored entities insuring mortgages and providing a secondary mortgage market for the mortgages, you know, they kind of intentionally trap people into this whole system of hey look, if you don't report enough income then you're not going to be able to get a mortgage. So that is true. And you know, we've had a lot of self employed clients over the years who have chosen not to take as many tax deductions as they could legally take because they want to make themselves better able to qualify for mortgages. So this is a trade off. I'll be the first one to say that it really is a trade off and what you want to do with your tax planning to whatever extent possible is rather than take deductions for expenses that you, you can legally take, you know, a lot of them when you have a business or you're self employed, you want to get the better type of tax write off which is depreciation. That's the holy grail of tax write offs because it's a non cash write off or a phantom write off. And there are some other tax deduct like that that enable you to, or enable really the lender to kind of, even though you reported and paid taxes on a lower adjusted gross income or AGI, they add that back in for qualifying purposes. So you kind of get the best of both worlds with some of these things. But what's done is done and you just have to shop around, talk to some good lenders. We can refer you to some good lenders. Just go to jasonartman.com and fill out any form on our website. One of our investment counselors can get in touch with you and refer you to good lenders that specialize in creativity and investment property loans, which really is a specialty and hopefully they can help you. If not, you know, maybe you have to wait a year, maybe you have to buy that property with cash, refinance it later. That's just the way it goes.

Well, and just thinking bigger picture, you know, bigger than financial is when you're transitioning into a completely new state. Now granted, you might know the area really well and you might know exactly where you want to be. But if you don't take that year as an opportunity to, to try a few different communities, see where you fit in, you know, where you, you know, what, what gyms do you like, what communities are you going to be a part of? And you might find that the area you wanted to buy in is not, not the area you want to stay in long term, even so. And then the other thing is, you know, we are facing, look at, if the rates were 2.5%, I would say like get something immediately, but rates are a little bit higher right now. So maybe this is a good transitional time to rent, you know, and see where you fit in there.

So yeah, that's a good point. You know, when you're moving to a new state, you never know exactly what area you're gonna like or not like. So renting is not the worst idea ever. And in fact renting your own home, if you're buying a higher end property or you, you know, you would live in a higher end property, I should say is really a pretty good deal. Just you want to be in the game and own lots of investment properties and then renting your own home is fine. Like what's the difference, right? The investment properties produce a better return on investment than your own personal residence does. You know, where you just get mortgage tax deductions. So that's better anyway.

And yeah, and Jason, there are some great financing opportunities for self employed individuals. They're called the DSCR or Debt Service coverage ratio. Those are for investment properties. But if you're in that one year transitional time and you still want to be an investor and have your money working for you, that is a type of loan that you could get into easily, maybe in another market that makes a little more sense for, for cash flow. So we can help you analyze some of this and run some numbers and you know, as Jason said, just reach out through the website and be glad to, to chat with you more about your unique situation.

Good stuff. All right, what's up next?

All right, well, I thought this would be a good segue into Jason, I'm someone who is just starting out and saving more money to buy a property with what feels like an unavoidable effects of inflation. How do you protect your as you save for the next property?

Yeah, you know, it's pretty hard to do that. I mean some would say buy precious metals, some would say buy Bitcoin. Of course, real Estate is going to be the best protection against inflation because of course, the property and the ingredients of the property, the copper wire, the concrete, the lumber, the petroleum products, the energy it takes to build a house, those are all very well indexed to inflation. So that's a really good hedge and a really good protection. But of course, the holy grail, the home run behind the scenes, the iceberg under the water, the thing people don't see that's not apparent to them and most people don't understand is the strategy I've been teaching for almost 20 years now, which is inflation induced debt destruction, where you or your tenant is paying that debt back in cheaper dollars over time and it's getting debased by inflation, so you're actually getting paid to borrow the money. It's an incredible wealth creator, incredible strategy. If you're not familia with that mouthful of a word, inflation induced debt destruction, just go to jasonhartman.com, type those four words into the search engine there and listen to the podcast episodes on that topic or look on YouTube. And you know, that's actually a suggestion when you type my name on YouTube, they've got that right next to my name is one of the suggestions I noticed because a lot of people search it. So really learn and understand that incredible strategy. But, but just the likelihood is that if your money is outside of real estate, it is getting attacked pretty hard by inflation. Yeah.

And really in inflation induced debt destruction, it's a mouthful. It's a mouthful. That is the play right now because it's very difficult to put little money down into real estate, even 20%. You know, we used to see loans where, you know, you can get 95% financing, you're putting in 5% down, but you know, minimum down now is 20%. It's very hard to cash flow property with these higher rates at, you know, 20 down, even 30 down, some of them are coming up with, you know, negative cash flow. But you, you really have to wrap your, your head around that. Inflation induced debt destruction. There we go. I said it. And really understand that because real estate is still so powerful even without that instant gratification of the cash flow. And the cash flow comes over time with, you know, with rent increase as well. But yeah, there's just so many ways to, to hedge against inflation. And a lot people don't understand, you know, they really don't. And it's, it's one of the things we're talking about every day with investors.

Yeah, more and more people thankfully are understanding, but still, most people don't get it. And that's that income property is a multi dimensional asset class. So you're earning your return from different sources, whereas most people just see the small amount of the iceberg that's above the water. You know, it's not much, most of it's below. And they think, oh well, you know, I'm going to make $200 a month in cash flow depending on how much I put. And they think that's their return on investment, but they just don't see all of those beautiful, beautiful returns underneath that. And so that's important.

I think, you know, one of the biggest mistakes I made in the pandemic, low, low interest rate environment was not stripping all of my equity. I did, I did cash out, refinance most of my rental properties, but I left one property that had really good, juicy cash flow and I just didn't want to, you know, over leverage. And now I'm looking back at like, what was I thinking? I just left all that money in the property and I could have had it out at, I, I could have literally taken that Money out at 2.75, I think, is what I have on that loan, or 2.8. And then I could have just put that money in the, in the bank earning 5%, you know, even if I were in Treasuries.

Yeah, Treasuries or yeah.

So that was, you know, a big mistake looking back. So if you have an opportunity to strip your equity and put it to work.

You know, I would highly recommend taking control of it.

So I couldn't agree more. Okay, next one.

Okay. Is risky to purchase a property in a transitional neighborhood where 10 to 20% has been renovated. Does this affect rental rates? Katherine?

Well, you know, I think the best answer to that is it depends because everything can be a good investment or a good deal if the price is low enough. Right. So it's all subject to the price. However, we found this a lot over the years that those cheap deals look good on paper, but they just most of the time tend not to perform as well. They tend to have more headaches, more hassles, and really the return is not as good as you think for the low end properties. Now we have lower end properties because you, our clients keep asking for them, you want them and you buy them. But you know, most investors kind of grow out of that. As they grow their portfolio and they grow their wealth, they tend to generally sell out of those properties over time and then trade up to better quality properties where they have better Quality tenants and just an easier, better experience with usually a better return on investment actually.

Well, and you get better use of the debt as well. And as, as we just discussed, that is a huge play right now is, is that, that debt? So if you're, if you're borrowing, you know, 20% on a hundred thousand dollar property or you're borrowing 20% on a $400,000 property, you know, if you can get similar and you're not going to get exactly the same rent to value ratios, the rent to value ratio is, is most likely going to be better on the cheaper property. Oh yeah, that, which is why it looks so juicy on paper. Right. And so you're going to have a lower rent to value ratio on the, the higher end property. But here's the interesting thing right now in this higher interest rate environment, Jason, is that these builders, you know, they don't want to lower the price of the home and maybe they can't. And so the way they're moving inventory right now is they are incentivizing people with a rate buy down, right? So they're contributing, you know, X amount towards the closing to get that 8% interest rate down to you know, 6% for example. And some of these older home like turnkey type providers are trying to duplicate that, but it's just not as powerful on a cheaper property. And if you're just buying an existing home, you know, in a neighborhood from say an owner occupant, you know, they're not going to think to do that same rate buy down or maybe not be able to do it. So working with new construction home builders right now, you're able to get that rate buy down and then you get a really good use of the debt because you're using one of your loans on a 400,000 debt versus you know, a hundred thousand debt.

So you're getting a lot more inflation induced debt destruction and you're, you're making that mortgage work harder for you because it's a larger mortgage. It might be four times the amount in your example. But I do want to mention Sarah, that you know, everything we say is subject to change because you know, someone might listen to this episode in a year from now or two years from now or whatever, we might be saying something different just because maybe what happened is let's assume like interest rates stay the same and it's the same kind of market. Right, which it obviously won't be. But let's just assume that for simplicity. But you know, maybe the new home builders raise their prices A lot more than the renovated properties. Right. And so that would make the renovated properties look more attractive as an offset to everything you said. And everything you said is true today, but it doesn't mean it'll be true always. So that's what really is important for everybody, to always understand that it's a dynamic market and things are always subject to change. So that's why be in touch with your investment counselor and they will help guide you through that process. And, you know, of course, keep listening to the show for updates on everything.

Absolutely. So, Jason, what do you think about interest rates? Where are they headed? I know we've got a war looming here and, oh, gosh, an election. Well, an election coming up and it's a crazy time.

But look, I, I am surprised as anybody that the Fed has been as, as hawkish as they have been. And now it seems like they're probably not going to raise rates anymore. But I just can't imagine they're not going to pivot soon and start lowering rates because things, they're going to break things. I mean, they haven't been able to kill the housing market, amazingly. I mean, real estate has got to be the most resilient asset class in the world. Look at what it has endured. The cost of money has more than tripled. I mean, any other asset class would have been decimated by that. Okay. And the cost of money has more than tripled. It's still chugging along pretty amazingly well. And unemployment, they can't seem to raise unemployment very much either. But, but if they keep these rates high, that government debt is getting awfully expensive for them to service the interest cost on $33 trillion in government debt. Also, the banks, they're running the risk of more bank failures, and that is expensive. And it's just bad for confidence in the economy to have that happen. So I can't imagine they're not going to pivot soon. But what do I know? Interest rates are the hardest thing to predict. They really are.

Any concern with like, rental saturation? You know, I was talking to a good client yesterday actually, and he's thinking about selling some of his Phoenix Metro properties on a 1031 exchange. And he said, you know, the, the rentals are a little saturated here. Like, I'm having a hard time, you know, renting my property. I've dropped the rent a little bit. And I was kind of surprised to hear that. But then I was wondering, you know, is that because all of these short term rentals are coming on the market as long term Rentals, because I know.

That was a. Phoenix is a particularly difficult market. And, you know, we haven't done business in that market in quite a while. But many years ago I was active in there, in and out at different times. That market is just very oversaturated with Airbnb properties that have either gone up for sale or gone up for rent. And just in general, it's become a very speculative, cyclical market. It used to be a linear or hybrid market, but not anymore. So Phoenix has. Has been a very hard hit market, no question about it.

Well, I'm planning to take advantage of some of these more affordable Airbnbs. I'll be headed out to Phoenix twice before the end of the year, so I'm going to get a better deal as a consumer, I guess, but.

Oh, you definitely will. I mean, they're cutting prices for sure. No question. In terms of short term occupancy prices.

Yeah, right.

Yeah.

So what else is on the agenda, Jason? I'm trying to get you to do another live virtual event.

Yes, and we will have that coming up. We're going to get a date for a virtual event. And by the way, if any of you have any requests on things you'd like us to cover, maybe you've attended the Jason Hartman University or JHU event, either live or virtually, because we've done it both ways. Or one of my core events, Creating Wealth. Okay. And you've attended that live or virtually. I know a lot of you have attended that one many, many times. Thank you for coming back over and over for that one. You know, these change, they're never the same Exactly. Right. But they sort of follow the same overall format and outline and framework. You know, if you have something else you'd like us to cover, any specific broad or deep topics, let us know. Go to jasonartman.com ask and let us know. And we will be happy to consider tailoring your either future episodes or live or virtual events to just your request.

Yeah, that's great. And, you know, it just reminds me that we cover a lot of these topics each month in Empowered Investor Pro.

It's a membership for investors and it's growing. It's just become an awesome community where, you know, we meet once a month like this on Zoom, and they're all recorded, so if you have to miss a meeting, you can watch it back. There's a platform for that where you can interact with investors and watch everything back. But really, I just love the live meetings because every month somebody comes with a little nugget that can help really just help your overall portfolio or they come with a challenge and it might be a challenge that you also need help with. And so it's like, you know, we're just collectively helping each other solve problems, different tips on, you know, softwares to use. Insurance companies, we've had some eviction attorneys recently come on.

And those have been great.

Those were super powerful. So that, that's great. If you're looking for a community, you want to stay plugged in. You know, things are kind of weird right now. And you know, the thing is we, we have to keep up with these changes in the economy and, you know, other, other issues. Like, you know, people are looking for home equity line of credit. They, they do not want to refinance their 2.875% mortgages. So every, every once in a while, someone will come on and say, oh, I just use this.

Insurance is going up everywhere. So just a great community. If you guys are looking to join, you can reach out through the website and we can help you with that as well.

And it's less than the cost of a mediocre to cheap gym membership. And this will keep your financial house in shape. So Empowered Investor Pro is a great deal. Go to empoweredinvestor.com, join us for that. The monthly zoom meetings. And sometimes more than once a month, we do them. Occasionally we throw in some bonus meetings when we've got something specific that came up up and you know, you get to interact with me, with the investment counselors, with the other investors. That is our best offering. I mean, you've really just got to join Empowered Investor Pro. Everybody listening needs to do that. It's a must do thing. And you get discounts on our events, virtual and live events, so you know that membership more than pays for itself. So go to empoweredinvestor.com and be sure to join us for that. And Sarah, thanks for going over a few of these things and we'll have you back to do more later. Okay, awesome.

Well, thanks for having me and we look forward to connecting with all of you guys in the future.

All right, happy investing, everybody.

All right, thanks. Bye.

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