#87: 3 Ways Real Estate Investors Can Benefit From Inflation

Welcome to the Passive Income MD Podcast where we talk about creating your ideal life through multiple streams of income. I'm your host, Peter Kim. If you enjoy hearing about this stuff, make sure to hit subscribe so I can bring it to you every week. Now let's get on with the show. Hey, what's up, everyone? Hope you're having a great week. Hope you had a great year. I don't know when you're listening to this, whether it's the end of a year, beginning of the year, whenever it is, I hope overall your time is great and you're making the most of your time. You know, before we talk about important things like inflation, talk about real estate investing, wanted to remind you really quickly that we have this end of the year community survey where we want to find out more about you, who's listening to this? 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Now, I don't know if you've turned on the news recently or open social media, but when it comes to financial news, one of the biggest topics that is, you know, that's trending today is is this idea of inflation. You've probably heard about it repeatedly now rising inflation rates right now, people, it seems rampant and it honestly has a lot of people worried about their money and their futures. And so something that I've always wondered is like when you hear these things, like, does it apply to me specifically? And if it does and affects me and my family, what measures can we take to mitigate those issues? What steps have I already taken? Can I feel better about it. Can I sleep well at night? Is this something that I need to, to change my behavior, change my portfolio? That's ultimately what I've been thinking about when it comes to inflation. Now, I don't know if you felt the same way, but I thought this might be a great topic to talk about on an episode of this podcast. Now, what is inflation? Now, I think about it in like really just two ways now. It's the devaluation of currency over time or the decrease in purchasing power of a currency. Either way, it honestly means the same thing for our wallets. It just means money just doesn't stretch as far as it once did. Even if we haven't spent or lost any money at all, we just can't buy as much with what we have. Now, just so you know, inflation, it's measured typically by something called the Consumer Price Index, or cpi. Now, what this does is it tracks the cost of just really a long list of goods and services at a given time. This allows current prices to be compared to past prices, determine how much costs have risen. Now, when prices go up, it's inflation, right? It's called inflation. When they go down, it's called deflation. Now, a good example of this people use, for instance, is the cost of a gallon of milk. Now, it used to cost a dollar right back in 1960. Now this year, September gallon of that cost on average about $3.68. So it's about, you know, 3.68 times than it was back in 1960. So I mean, I don't know about you, like when you fill up your gas, you know, you remember when you look at the prices right now, you're like, whoa, I remember when this thing was under a dollar. Now I do. Specifically now, you know, in our Nationally, it's like $3 and 40 cents. I live in California, so, man, we Wish it was $3 and 40 cents. But the price of these goods and services have gone up over time. Now, while prices in certain sectors, right, it's ebbed and flowed naturally just due to like various industry factors, right, demand. But overall, all of these things have slowly but steadily increased over the years. Now, just so you know, over the past decade, I've looked at these charts, we've experienced really relatively low inflation rates. When you look at like the historical kind of highs and lows over time, inflation is typically, you know, average somewhere about 2 to 3% per year. But in the last 10 years, from like 2010 to 2020, just so you know, it averaged a Little bit under that, about 1.8%. And just so you know, the last 12 months that's been a different story. And that's why you're hearing all these news stories about it today. In the last year, inflation rates have reached these peaks that really haven't been seen for more than 30 years. Like I. They're just charts. If you go to New York Times and you look up like inflation charts, it's pretty jarring. In October itself, that was like, just that month, it was about like 6.2%. So you can see that this, there has been like a serious uptake in the past few months in the past year. Now there are all these theories about what has caused this inflation. And to be honest with you, when you talk to economists, when you talk to people, the answer is probably it's pretty complicated. I mean, I think that most people don't agree on the true reason for inflation, but they will all say that there are multiple factors involved. To me, when I hear about things, the explanation that makes most sense to me is that inflation occurs when the growth of the money supply outpaces economic growth, right? So, for example, if the government recently printed like $3 trillion, right, just so you know, what that meant is that 40% of the supply in circulation right now that's been created in the last 12 months, 3 trillion 40% of all the money supply in circulation has been created, right, in the last 12 months. Now I know that economic growth hasn't matched that. So when there's more money out there, right, it's being thrown around. And at the same time, right, demand remains the same or demand for a product maybe even increases then I know, just by natural economic factors, the price of that product, right, or service, whatever, it's going to increase over time. So what does that mean for your money, right, that's sitting in a low yield savings account, right? Or some sort of really super conservative investment, you know, opportunity or option. It means that when inflation is happening and it's like pretty high, the money that's sitting in those accounts, right, or in those investments, you know, they're actually decreasing in value over time. And that's not a good thing, right? Our savings accounts right now online, the amount of interest you can get on that are minimal, right? If you're lucky, you can get 0.5%, if you're lucky at that. But the thing is, the money's being devalued right now, at least in the past couple months at like 5 to 6%. So what can we do, right, what should we do? And how can we stop our money from losing value? Basically, just like a burning a hole in our wallets, in our pockets. It just means that we have to really smartly invest, right, in order to at least keep up with inflation, right? So our money that we've worked really hard for is not being degraded over time. Just so you know, real estate investment, the reason I love it, one of the reasons is actually that it's considered the great hedge against inflation. And we're going to talk about why that is. I mean, inflation, to be honest with you, it's actually a good thing oftentimes for real estate investors if they put themselves in the right situation. So we're going to talk about today those benefits that allows real estate investors to actually do well in times of inflation. And in fact, I believe there are three ways, actually three big ones that we can talk about today. Number one, inflation can help erode debt. Now, one of the most powerful tools that I absolutely believe to accelerate wealth and profit in real estate investing is the use of leverage, right? Or debt, that's another name for that. You take a mortgage out, you utilize that to purchase a larger property and, you know, grow your profits. And by being able to use this and taking advantage of this, both as an active investor and a passive investor, you can do it with both. That can be a really powerful thing. Now, we talked about inflation and how it erodes the cash in your pocket. But just so you know, it also erodes whatever outstanding debt that you have, right? Especially if it's at a lower rate than the rate of inflation. For example, if you have like a 30 year fixed rate mortgage and it's sitting there at like 3.5% interest rate, that comes up to about 4,000amonth, right? In what you're paying, you're going to still be paying that 4,000amonth payment in year 25, right? Every year it stays the same. It's consistent, however, due to inflation. When you think about it, that 4,000 that you're paying in year 25, it's actually worth quite a bit less in the future. Just so you know, if we use the standard inflation rate, like 2.5%, that $4,000 payment that you're making in 25 years would be essentially equivalent to about half that amount today. So it's kind of like paying in 25 years, $4,000 is kind of like paying $2,100 today. And that's a powerful benefit of inflation when it comes to having debt. And so what some of the advice you'll hear out there right now that, you know, in high inflationary times is that people like to take on debt for certain assets and especially when it comes to real estate. So debt tends to lose its value. Now, number two, this is a benefit as well. Rents tend to increase in that time. So when inflation strikes, when it's there, rents tend to increase. I mean, it is essentially a goods or services having that rent. And it really follows the inflation line over time. You know, demand for rentals, they say it actually increases during times of rapid inflation. Just so you know, people tend to get priced out of buying homes that you've seen the price of homes in your area. And a lot of people, they just can't afford it anymore. So where do they turn to to live? They have to rent properties in the meanwhile. So demand for those rentals tend to, you know, be higher, which actually causes rents to increase over time. And also number three, another benefit is that prices appreciate. Now what does it mean? Prices appreciate means value goes up over time. I don't think it's a coincidence right now that home prices all across the country, they're still continuing to increase at a rapid rate. I mean, it may not be as, you know, increasing as rapidly as it was a couple of months ago, whatever it is, but interest rates are still low, inflation is high, and there's a ton of cash out there. I mean, sometimes I see all the purchases out there, I see the rising prices. I'm like, holy cow, like, how is this happening? You know, prices are appreciating rapidly. And what that does is for people who actually own properties, that is actually helping to build equity in there. So what that really means is that even if the property of the the value goes up over time, you get to capture 100% of the increase in value of that property. While you only have to put down 20 or 30%, that debt is fixed right for that 80 or 70%. But everything that you know in terms of the value that goes above and beyond that, you capture that in terms of yourself in terms of increased equity as a real estate owner. And if you look at any charts out there when it comes to mapping and charting real estate values, you'll see that it tends to keep up with inflation at the very best, and sometimes it actually exceeds it. So just putting this all together, like we've been living in this, like past 10 years, like this pretty low inflationary environment where we said it's like almost sub 2% in average, to be honest with you, when you talk to experts, it sounds like higher rates of inflation. They're here to stay for a little while. I mean, there are so many different reasons why, again, money supply, but also supply constraints and, you know, supply chain issues you've probably heard about. Just so you know, as an investor, there's an opportunity for you to take advantage of this. If you've already, you know, invested in real estate, you are taking advantage of this. But there are ways to take advantage of this moving forward. So if you've been thinking about not only like how to hedge against this inflation, but really profit from it, just so you know, real estate investing might be a great opportunity at this time. You know, whether it's investing yourself, owning your own rental properties, or even investing passively through someone else, both take advantage of high inflationary periods to actually create profits for real estate investors. Hope that was clear. Hope you enjoyed that and let's talk again soon. Enjoy the show. Let me know by dropping a review in the podcast app you're listening to us in. And if you haven't already, make sure to hit subscribe. Are you part of our community yet? Join thousands of physicians who are also on this journey to creating their ideal lives through multiple streams of income. You can join us on our Facebook group Passive Income Docs, and you can always learn more at our website passiveincomemd.com thanks again for allowing me to be a part of your journey. See you next time.