How You Can Profit From Inflation – Keith Weinhold
You are going to learn how to profit from inflation.
First, Let’s Define Inflation
Inflation is the rate at which price levels rise. It results in the diminished purchasing power of your dollar, which keeps getting “watered down” over time.
It is why in 1913, a pack of Wrigley’s gum costing you 4 cents will cost one dollar today. Source: US Inflation Calculator.
It is why your $8 Chipotle burrito will soon cost $9.
Indeed, your net worth might be higher next year. But at the same time, you will have diminished prosperity if your net worth increase is less than the rate of inflation.
Why Investors Need To Think About Inflation
You don’t think about inflation as much as you should. Part of the reason is because you’ve never seen an “inflation bill” alongside your electric bill, internet bill, credit card bill, and Netflix bill.
Inflation is insidious – an invisible tax, a stealthy thief.
This gradual and inevitable dollar debasement is precisely why you wouldn’t keep a million dollars in the bank for three decades.
How ludicrous! In thirty years, a 4% inflation rate will whittle your million bucks down to just $308,000 of purchasing power.
“Inflation is always and everywhere a
monetary phenomenon.” -Milton Friedman
Inflation is why millionaires will be poor people in the future. Think that sounds ridiculous? It’s absolutely inevitable.
Inflation has already transferred the “millionaire” label from wealthy to middle class. Many thought that was inconceivable.
From Ancient Romans crudely clipping the edge of denarius coins to the U.S. Federal Reserve’s Quantitative Easing in the 2000s, governments and central banks feed their inflationary mandate. They also have a decided motivation to underreport the true rate of inflation. They’re both separate discussions.
How Do You Start Profiting From Inflation?
Most real estate investors do not understand all the ways that they are paid. What’s more, most real estate investing educators don’t even understand all the ways that real estate investors are paid!
Inflation-profiting is just one of at least five simultaneous wealth centers for real estate investors. We have the ability to borrow with long-term fixed interest rate debt, all while tethering debt to a cash-flowing asset.
When you borrow this way, your monthly debt payments are completely outsourced to tenants.
Why rush to pay down your loan when both tenants and inflation erode your debt’s burden for you?
Instead of using a dollar for debt paydown, you could use it to invest in more real estate or enhance your lifestyle.
How Exactly Does Inflation Benefit Debtors?
You wouldn’t keep a million dollars in the bank because your purchasing power will corrode. Oppositely, when you borrow a million dollars, inflation erodes the weight of your debt.
In thirty years, a 4% inflation rate will whittle your million dollars of debt down to only a $308,000 debt burden.
Sometimes it’s hard to conceptualize a 30-year time horizon.
So with your million dollar loan and say, 10% inflation over just a couple years, you only have to pay back a million dollars in nominal terms. Nominal means “in name only”.
Your lender is not requiring you to repay in inflation-adjusted, real dollars.
That’s just $900,000 that you need to pay back in real terms.
As time passes, an inflating currency supply means that wages escalate, consumer prices spiral higher, and your rents will be higher. Therefore, it’s ever-easier to pay back this type of debt.
Inflation-profiting is perhaps your quietest wealth center as a real estate investor. It’s a “friendly phantom”.
Your property’s, say, $1,250 fixed-rate monthly mortgage payment won’t rise with inflation either. But historically, your rent income does. This also quietly grows your monthly cash flow.
If you don’t have a loan on the property, then you miss these inflation-profiting benefits.
Inflation transfers wealth from lenders to borrowers. Lenders are paid back with diluted dollars.
Inflation also redistributes wealth from old to young. Why? Because older people have more assets and younger people have more debt.
Even when I’m older, I’m going to carry lots of debt because I understand how inflation benefits long-duration fixed-interest rate debtors. Real estate investors are optimally positioned to take advantage of this.
Globalization and technology might slow inflation’s creep. But I don’t believe that it can reverse it.
To be wealthy, you need to both think and act differently than the crowd.
“Whenever you find yourself on the side of the majority,
it is time to pause and reflect.” -Mark Twain
Leveraging smart debt enabled me to achieve financial freedom faster.
From a young age, I’ve possessed millions of dollars in debt. Next, I’m aiming for hundreds of millions of dollars of debt.
It all sounds so paradoxical, doesn’t it?
Importantly, each debt origination is smartly anchored to an asset – a property – that’s worth more than the amount of that debt.
It’s property that also creates cash flow, located in a geography with diverse economic sectors. This way, I have a reasonable expectation that job growth will continue to support rent incomes. These incomes service the debt – and even provide me with a cash flow stream.
If the value of the asset temporarily drops like I experienced in 2007-2009, I’m not very concerned as long as it still produces income.
Not only am I hedging inflation with this smart debt, but this helps me use financial leverage to amplify appreciation, and it creates generous tax benefits.
Then Why Does Debt Get A Bad Name?
Debt gets a bad name because your first experience with debt was when your debt was tied to something that didn’t produce income.
You were forced to work overtime on the weekend in order to make your Honda payment. You made sacrifices to pay credit card finance charges on a Morton’s Steakhouse dinner that you splurged on six months ago.
You paid for your Honda Civic. Your Honda Civic never paid you.
That’s why debt has an undesirable connotation to you.
Unlike real estate, you didn’t have your debt paydown outsourced to both tenants and inflation, while it fed you a durable income stream.
When you use smart debt tied to an income-producing single-family home or eight-plex, now you’re on top of debt, not trapped beneath it.
What’s Your Bottom Line?
Borrow massively. If you do what the crowd does, you’ll only have what the crowd has.
Use loans and leverage to your advantage. I maximize loan amounts across my portfolio. My favorite is the plain vanilla 30-year fixed amortizing loan.
A 15-year active real estate investor, I have small equity positions in many income properties rather than large equity positions in a few. My wife and I’s primary residence is even strategically mortgaged to the hilt.
Even though I have the ability to be debt-free, being financially-free is more rewarding. We always talk about this on the Get Rich Education podcast.
Consider doing what I’ve done. I understand the risk and opportunity cost of allowing equity (a zero-ROI ingredient) to accumulate uncontrollably in any one property. My velocity of money stays high with cash-out refinances and 1031 Tax-Deferred Exchanges.
Some real estate enthusiasts burn their time – your most precious and irreplaceable resource – grinding by flipping, wholesaling, or self-property management.
Why grind when you can live well? I have laborers dutifully standing by. They’re named “Leverage”, “Tenants”, and “Inflation” and they do my work for me. Guard your time.
Your currency will keep losing value. Rather than this causing frustration, now you know how to turn it into your profit.
This is why I’m an inflation cheerleader. I feel validated when Apple products or Starbucks drinks experience another retail price hike!
Some people have so much bad debt that they can’t sleep. If I didn’t have enough smart debt, I couldn’t sleep.
It is no wonder why “debt” is my favorite four-letter word.
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