Vladimir Lenin once said the way to crush the middle class is to grind them between the millstones of taxation and inflation. It’s true, and it’s happening.
Inflation and Real Estate Investors
Financial industry insiders talk about monetary policy issued by central banks, exchange rate policies, and inflation rates, most of which are not fully understood – and are completely ignored – by the general public. What you need to know is that the odds are stacked against real estate investors in a more comprehensive and complicated way than most people are aware.
The Advantages of Understanding Inflation Theory
The good news is that, when you’re armed with this knowledge, you gain the ability to not only protect yourself from cost-push inflation and demand-pull inflation, but to also find new sources of wealth in unexpected places. The real return associated with these sometimes counterintuitive sources of wealth can be substantial because they work with the underlying flow of wealth rather than against it, notwithstanding the current monetary policy in place.
How Inflation Rates Affect Real Estate Investors
If you don’t understand inflation theory, stay tuned, because our guest today is going to dive into this with me. It’s something that will be an eye-opener for you and possibly even a paradigm shift. I strongly believe that understanding the three forces of asset deflation, monetary inflation, and taxes for inflation will be the single, most important thing you can do to protect and improve your standard of living over the long-term, whether there is price stability or not. I believe these forces will be the primary determinants of real financial success for investors in the decades ahead and that those who fail to understand these forces of economy will be a great risk in the future.
Join me on this amazing interview with one of the smartest guys I know on the subject. It’s an episode you’ll want to listen more than once, so don’t go away.
If you missed our last episode, be sure to listen to Millionaire Success Habits: The Gateway to Wealth & Prosperity – Dean Graziosi.
Enjoy the show!
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Daniel Amerman – Inflation, Deflation, Debt and the Coming Housing Crash?
It’s my pleasure to welcome Dan Amerman to the show. DDan is a chartered financial analyst and a former investment banker with an MBA and a BS and BA degree in Finance. Dan has over twenty years of financial experience. As a former real estate investment analyst, he is more than well-qualified to talk about the relationship between the economy and real estate. Dan, welcome to the show.
Thank you, Marco. I appreciate you having me.
It’s an honor to have you here because I invested in some of your courses and material years ago and it was just absolutely fascinating. One of your programs, which I have on my bookshelf here next to me, is Turning Inflation Into Wealth. It’s quite a package. Let’s start off by you telling us a little bit about yourself and what you like to study.
I’m a numbers guy. I guess I take maybe some non-traditional approaches to things. I was pretty conventional as a professional, financial analyst for institutions and major developers and so forth for many years. But I was really getting into studying what I felt was on the way in terms of retirement of the Baby Boom, in terms of global economic changes and so forth. I was very dissatisfied, number one, with most people’s understanding of these issues. Number two, and even more importantly, what people can do about it. I suppose I reached a point where it could have been pretty easy for me to become doom and gloom contrarian or something like that. I felt that was not at all a good use of my own background, my own professional experience. What I have been focusing on for many years now is coming up with what would be for the average person, a very unconventional method of preparing for the future; real solutions for things that we can do about things like inflation and deflation, the possibility of financial crisis and so forth. The materials that you have, the Turning Inflation Into Wealth video course is one of those products. As you know, there’s just a whole lot of information in there that is simply not available elsewhere.
There is a ton of information and it can be overwhelming. The thing I like that you do is you help to explain it at length, but at the same time simplify it so it makes it easy to digest.
That’s a niche that I feel so badly needs to be filled. The issue is I come from what’s known an institutional background. A lot of my experience in the industry was putting together real estate deals for some of the largest, most sophisticated investors in the country. They just play the game on a different level than I think is usually done on more of a retail basis, let’s say someone who’s buying single-family homes or small units in terms of houses. In bridging that gap, there’s an enormous amount of room to help people.
On that note, let’s just start with some very high level simple explanation of two common concepts that we hear talked about a lot, and that is inflation. It seems that few people understand what it really means. There are different definitions for what inflation and conversely deflation is. Just to help set everyone on the same page for the rest of this conversation, let’s just define what inflation and deflation is.
There are really three basic ways of doing that. I don’t mean to get too complicated but it’s easy to get confused if you’re talking about one thing and somebody else is talking about something else altogether. The basic definition for inflation that I think most people would use is a decrease in the purchasing power of the dollar. The way it’s measured, for instance, with the consumer price index is how many dollars does it take to buy a given basket, as it’s known, of goods and services at any point in time. The more dollars it takes, the higher the rate of inflation, the less the dollar will buy. That’s something that people can understand.
The problem that you run into is with people who have taken an Economic 101 course or they’ve been reading about it. They want to tell you that what inflation is, is an increase in the money supply. It’s got nothing to do with price changes, that the economically sophisticated way to look at things is that inflation is an increase of the money supply. But there’s a problem with that. It’s all academic theory.
We’re not talking price inflation, we’re talking monetary inflation.
You can have many different theories for how monetary inflation creates or impacts price inflation. As individuals, what we’re trying to do is find ways to survive and even prosper with the destruction of the purchasing power of money. There’s a third way of looking at inflation and deflation that I would argue is the most important. It is something that’s more commonly used by professionals, in terms of people who are really out doing this stuff, as opposed to what the general public understands. That has to do with changes in the purchasing power of assets. If you have asset inflation, then that means something, it could be a house, it could be a share of stock, it could be precious bells, it could be any of those things. When we have asset inflation, that asset will buy ever more goods and services than it would before. Conversely, if we have asset deflation, then that asset buys less than it would before in terms of what you want to consume or the lifestyle you want to support. Where things get interesting but critical is that price inflation hides asset deflation, commonly.
What you just said is a paradigm shift for a lot of people because a lot of people think about purchasing power in terms of dollars, more specifically US dollars. We’re denominating our purchases with cash, with currency. What you’re talking about is one asset or asset class versus another, for example, how much of the Dow can you purchase with gold? How much housing can you purchase with dollars, gold, oil, or whatever the case may be? You’re comparing one asset or asset class to another, not just to the dollar and only the dollar, correct?
What I’m looking at is purchasing power in terms of goods and services that a given asset class will purchase for you. It’s also really interesting. I’ve got, for instance, a very well-received analysis on my website that tracks the housing to gold ratio over time and takes a look at these two tangible assets and how they each go up and down in value around their respective means. When you understand that, it becomes possible to get more value from your investments. I will say as well that for someone who is a real estate investor, understanding the difference between price inflation and deflation and asset inflation and deflation is just absolutely critical.
What you’re talking about is one is in nominal terms and the other is in purchasing power terms.
Exactly. One of the examples that I cover on my website is taking a look at what happened with housing prices in the period from 1972 to 1982. What happened is the average price of a home in the United States went from about $17,000 up to about $44,000. It would seem that owning a home during that time period would have made you an enormous sum of money. It did some people. For the most part, you would have actually lost money, if you’re looking just at the house by itself and not the mortgage. The purchasing power of that house, once we adjust for price inflation, dropped from about $17,000 down to about $16,000. On the one hand, because the value of the dollar means that the house sold for a lot more dollars, it looks like you made a lot of money. If you look in purchasing power terms, you actually lost money. Going to be a knowledgeable real estate investor, you really have to always be able to tell the difference.
That’s a key thing to understand. A lot of people, I’d say most people, don’t even think about that because they think their $100,000 purchase, that house that’s $100,000 a day that they sell for $200,000 ten years from now or whenever it may be, made them $100,000. The reality is that the purchasing power of the dollar is diminished, and if it went down more than the rate of inflation on that house, you’ve actually lost money in terms of purchasing power. Is that a good summary?
Yes. Then the other just critical factors that you need to take into account are the financing on that property and any taxes that are due. The problem with taxes is that the Federal Government creates inflation, which means that any asset that even roughly keeps up with the rate of inflation is going to be worth ever more money even though its purchasing power may be staying constant. Nonetheless, when you sell that asset, you’re going to have to pay taxes on them. It’s true for real estate; gold is a very good example here. Let’s say that gold was selling for $500 an ounce. It goes to a $1,000 an ounce because it is keeping up with inflation having dropped the value of the dollar in half. You’re actually breakeven in purchasing power terms. That’s what you’re hoping with gold, is to be perfect money to just maintain value with inflation. Instead what happens then is that the IRS looks at that and says, “You doubled your money, we want our share.” By staying even with inflation, you’re actually paying taxes. The government actually has a very sophisticated tax that it applies to most of the country. If you’re an economist or you’re a professional financial analyst, you’re going to know the term inflation taxes and how critical that is. But the average person simply doesn’t.
This is a good segue to the next thing I want to talk about because we’re going to come back to these two concepts here in a bit. I just want to stay on the economic side of the equation here before we dig deeper into the real estate stuff. Sadly, our government is just saddled with debt. We’re talking about debt here. They just can’t seem to stop spending, even if they wanted to because of the promises they can’t afford and the fact that we live in a debt-based monetary system. You talk a lot about financial repression, I know this is a concept that most people just have never heard of before, let alone understand. I think we should touch upon it. This is an important concept to understand because governments around the world are literally, deliberately, methodically stripping our wealth away from us. It makes me angry when people understand that this is going on and should make them angry too. We don’t need to get into the weeds on this, but just at a high level, what is financial repression and why should we even care?
Financial repression is our collective history. Well-educated and economics can understand this very well. Even though the average person if they’ve never taken economics or maybe they never went past economic 101 or whatever the case might be, might have no idea what financial repression is. There’s something about that name that almost sounds a little conspiracy theories or something like that, but it’s not. This is classic macroeconomics. The cycle that we went through before was during World War II, the United States and other nations ran up huge debts paying for the price of the war. By the time the war was over, the United States as well as much of Europe, Australia and so forth were in a very similar situation to what they are right now where the national debt was actually a little bit larger than the size of the national economy. This is really problematic for nations. Academic studies have shown that growth rates are lower over time for nations that have higher debts than nations that have lower debts.
What the United States did and what the European powers did and what Japan did, what Australia did, is that they kept interest rates very low and they pushed the rate of inflation above interest rates. Let’s say just for example sake that you have a 1% interest rate and inflation is 3%. What does that do? It means that you have 1% more money at the end of the year than you did at the beginning of the year. It looks like you’re ahead, but that money only buys 97 cents. Math doesn’t quite work that way. You’ve actually got 98 cents left at that point. Conversely, if you take the largest debtors out there, which were the governments, and now again it’s the governments again, they are paying a 1% interest rate on their debt but inflation is 3% whether they say it’s inflation or not, it’s a different story. When inflation is 3%, then the value of that debt is declining by 2%. This is a direct transfer of wealth. Again, this is totally accepted macroeconomics from individual savers to governments that is deliberately set up to transfer wealth. If you look at where we’ve been in recent years, how much do people earn on their checking account or their savings account?
Less than 1% if that, I mean zero.
It’s very close to zero. We have the government saying inflation is close to 2%, I would argue it’s more like 3% or 4% maybe even a bit higher than that. Whichever measure you’re using in there, the average saver because they are saving their money is losing purchasing power on their savings every year. This is a complete reversal, let’s call it the great American dream, of how saving is supposed to work. How saving is supposed to work is you save money every year and you earn interest on that money and over a time wealth is steadily created for you. When governments are heavily indebted, they have the power to their control of the monetary financial system to turn the tables on savers and over a period of decades, reduce the national debt through a steady process of what is known as financial repression.
The losers are savers. That’s why they say savers are losers and the winners are the people who hold debt. In an inflationary environment, you’re on the right side of the equation by being a debt holder. We’re doing exactly what the government is doing. We’re inflating away our debt just like they are doing with the national debt.
You’re exactly right. Savers steadily lose money because the whole point of financial repression is to redistribute wealth from savers to debtors. An incidental byproduct of that if the government is acting in its own interest as the world’s largest debtor, by borrowing money on a safe basis, not getting too crazy with leverage or anything like that, but on a safe basis, to finance real estate purchases then the same force that the government is using to redistribute wealth from savers to debtors, is then flowing to our direct financial benefit.
We can do exactly what they’re doing in terms of inflating away our debt. The US government has no choice but to destroy the value of the dollar. You talk about five or six different reasons why and I understand them at a relatively high level. Can we touch upon those? What are the reasons or the motivations the US government wants to destroy the value of the dollar? I know that’s a bold statement but it’s a fact.
There are several reasons for doing that. The first one comes around to what we were just discussing which is the value of the debt. Again, this is time honored. This is how governments do things across different continents, across did centuries, that’s what they’ve done again and again. They get heavily indebted, they reduce or destroy the value of the currency and then the debts go away compared to the national economy, more or less. That’s what they’re tempting anyway, this is happening time and again.
Another very powerful reason that governments have to increase inflation is that it produces higher taxes because of what we’ve talked about earlier which is inflation taxes. Any asset that keeps up with inflation be it precious metals, be it a house, be it common stocks or supposed to be a good form of doing that. What happens is, the prices are getting steadily higher and the government is collecting steadier higher taxes in form that most people simply don’t understand.
The other just hugely important factor is psychological. When it comes to people investing, when it comes to maintaining healthy asset markets that are generating substantial tax revenues for the government, most people say they understand inflation but they don’t really fully incorporate it in how they look at things. We read about a continuous series of the new highs that are being set in the market. This can be the stock market, this can be the real estate market, this can be comic books, this can be art, this can be any of those. In some cases, they really are new highs in terms of purchasing power but more frequently, every time we read about a new high, what we’re seeing is the effective inflation.
These are artificial market highs?
Exactly, but they’re psychologically very important. They’re also lucrative from a taxation perspective.
People feel wealthier psychologically even though in real terms they’re not. At the same time, there’s this stealth or hidden tax that the government is taxing you on a higher nominal rate on these assets. They can tax you more even though you really haven’t made much more or anything more on these assets.
Exactly. A lot of people don’t think about this. If you were to ask the average person, they may say first that maybe a 3% of inflation is no big deal, but they may view it as also being just a natural part of the monetary system. It’s always there. Maybe the government has nothing to do with it. The fact of the matter is that ever since United States went off the gold standard in 1933, creating an annual rate of inflation has been a matter of central banking and governmental policy. There are really powerful reasons for that, including what we just went over in terms of management of the size of the debt, in terms of significantly raising the tax rate in real terms and inflation adjusted terms above what the state of tax rate is and in terms of creating a psychological atmosphere where people are piling more money into stocks or housing, whatever the case is, because they believe the prices are going up, up, up, that new records are always being set. Those records can happen, but actually when you look at things in a purchasing power basis, new records are much less common at a much lower level than most people think.
It’s pretty scary what is actually going on. Here’s an example of financial repression. These are just rounded numbers, but if you had $1 million and you invested it in two-year treasuries back in 2007, this was right around the time when the housing market was starting to unwind. That $1 million should have generated $48,000 per year in interest. You look at that just more recently that same $1 million in those two-year treasuries is only going to generate just over $2,000 per year. That’s a huge difference. We’re getting crushed as average investors. We really have no place to invest for money to get yield, to get a return, and I will of course argue that income generating real estate that is leveraged is probably the best place to invest your money and keep up or beat the effects of inflation. That’s why I love real estate so much. Back to why the government has to destroy the value of the dollar, I would argue that it would be to avoid depression as well. The Federal Reserve doesn’t fear anything more than avoiding depression.
They absolutely want to avoid depression if at all possible. This is one of the issues why we have, what some people call fiat based money, is to avoid the possibility of price deflation which some people believe could help create an economic depression. At the very least, what price deflation does is it reverses all three of the factors that we talked about, which is why the Fed works so hard to keep that from happening. One of them is that with asset deflation, the federal debt goes worse instead of better. We also have the issue that tax rates are lower instead of higher on a real basis. The psychology is terrible for people as a whole because everything is worthless money.
There’s also the argument to be made that governments use their currency in currency wars to help or at least try to boost their economic growth. China wants to keep their currency at a low value to keep their labor rates low and therefore countries like the US will export jobs and goods to be manufactured over there so we can buy it cheaply here. The flipside is true where we want to keep our currency high so that we have more purchasing power relative to other currencies so we can buy other countries’ goods on the cheap, right?
Yes. There are some really fascinating and important relationships there that many people don’t fully understand but are nonetheless critical. When you have a high value like a strong dollar policy like the United States has generally pursued, that number one reduces inflationary pressures because we are able to buy goods for less money all the time. That means a lower rate of inflation overall. At the very same time, there’s a very powerful hollowing out effect. If you look at the massive job losses in terms of the really good manufacturing jobs that used to be there across much of the heartland of the United States, there’s a strong economic argument to be made that it was the one to two combination of a strong dollar approach with globalization that in fact destroyed those jobs.
To make all that worse, they use it as a political tool. They use the inflation of the dollar which is really just creating more debt increasing our deficit as a political tool to maintain promises and make more promises and that should anger a lot of people.
It should. People don’t really understand the games that are being played.
We have an uneducated voter base is basically what we have.
I would say we have a partially educated voter base. It’s not that they’re completely uneducated but the game is in many cases being played at a higher level that someone in the area is going to be able to get track off.
Do you think there’s a chance in the future that we’ll see bank bail-ins like what we saw in Cyprus a few years ago?
Yeah. The G20 agreed to pursue that explicitly in 2009. By 2014, it was in place around the world, it’s in place right now in the United States. The question is in place in Canada. The question is whether it will be used or not and to what extent because there are some political dynamite there. Over in the EU, they had agreed to use bail-ins, but what they’re actually using in practice is bail-outs. For instance, with this most recent bail-out in Italy that was supposed to be a bail-in. That may sound really good for savers but it’s potentially catastrophic for government finances.
I’m sure a lot of listeners are thinking to themselves right now, “How do I protect myself? How do I protect my savings?” One comment I would have is just don’t put all your cash or all your savings in the banking system or in a savings account or even in the stock market. That’s my personal opinion. What would you say to that?
I would say this is one of those fundamental questions that people usually don’t think through. You have to ask yourself though, “What is an asset?” There are two different assets in a broad sense. My own profession in terms of financial analyst don’t necessarily distinguish between those or to the extent they do so, it may be based on different criteria than some people would like. One type of asset is something that has inherent value that you can sell. A house or a piece of land has inherent value and you can sell it. The value is not in the financial market. The asset itself has value. You could say that even though they are traded in financial markets, that a share of stock has inherent value because it’s an ownership share in a company. You could say that a gold coin has inherent value because of the value of the gold itself.
There’s an entirely different type of asset that is very widespread and often people don’t really think about the difference, maybe a good starting point would be cash. If you have any bills in your wallet, you’re old fashion that way, maybe not all your money is on your smartphone, pull a bill out and look at what it says.
It says it’s a note.
It is a Federal Reserve note. What we call cash is all debt of the Federal Reserve. Let’s talk about money in the bank. What’s the money in the bank? It is a debt owed by the bank. What’s an annuity? It is a debt that is owed by the insurance company. What we’re taught is the very safest assets to have are other people’s liabilities which works greats until it doesn’t work. The interesting part is that from a risk reduction perspective, the usual choice in the financial industry is to choose assets that are really other people’s liabilities over real assets because they’re subject to less price fluctuations. They do have certain fundamental risks, as we found in 2008 and as we may find out again sometime in the future.
Money is not money. Money is a currency and it’s really only there because people have faith in it. When it changes, then who knows we might see hyperinflation.
It’s a possibility but the other thing just to keep in mind is to just take this perspective and it can really change how you save. It can really change maybe some of the long-term plans you make for retirement this very distinct difference between an assets that’s an asset and an asset that is just someone else’s liability. This is where bail-ins become really important too because how a bail-in works is it saves the financial system by reducing the value of the liabilities, which is another way of saying that the financial system is saved by reducing the value of the assets of the savers.
Which again is inflation theft, a stealth tax.
It is in a way, yes.
This is one of the reasons I love real estate is because with real estate you have two strategies going on. You have a defensive strategy and an offensive strategy and you can call this debt and appreciation or debt and inflation. I think you understand what I’m saying. Can you explain these two concepts and how they relate and work with each other and how they relate to inflation?
Something about real estate is probably going to sound a little bit unusual to most people. The main reason that I like real estate is because it provides access to high quality liabilities. It’s the only access to high quality liabilities that the average person has to any major degree. Again, if you’re looking at being an individual who is borrowing, let’s say you’re doing credit card debt, that’s outrageously expensive, compared to let’s say a Fortune 500 company could borrow at or that a bank can borrow at. Generally, almost any type of loan that you’re going to take out is going to be a far higher rate than a corporation would pay to borrow. That means that individuals are precluded from taking advantage of debts and inflation to the extent that governments and major corporations are, in the United States at least. It’s not necessarily true in other countries. In the United States, you have the ability to get very low interest rate debt at a fix rate for a long period of time. That allows you to do things with asset liability management strategies when it comes to profiting from inflation on an entirely deliberate basis when it comes to profiting from below market interest rates, when it comes to profiting from reversing inflation taxes that are otherwise simply not available.
The beautiful thing is that we as real estate investors can acquire these assets and finance up to 80% of it with cheap debt and lock that interest rate in for 30 years on a 30-year fixed rate loan and just have inflation work for us where it destroys the value of that debt over the years. Essentially that’s what you’re saying. It creates wealth for us just because time is on our side in an inflationary environment.
Yes. I have some extensive resources there. I’ve got a financial analysis manual with just many hundreds of exhibits and a six DVD set that goes with that explaining it that takes a whole different approach to real estate investing. The idea is that you’re looking not just to the asset, of course you want to do the best job you can with the asset, but to look at the debt because the liability management is every bit as important as the asset management. When you explicitly understand that, you gain the ability to set up all sorts of strategies to put down on your particular circumstances that are just really good, that are simply not available at an asset-only basis. Real estate offers a unique ability to tap into these types of strategies that ordinarily only corporations in governments can do because of their access to the good liabilities.
This levels the playing field for us average Joe investors. You’ve got a great book called The Secret Power Within Your Mortgage. That’s where you explained this concept and how it works. It’s important for real estate investors to really understand this because this is not something you typically see on a pro forma when you’re looking at investment real estate. You want to invest, you want to build a portfolio and this is a huge advantage. You don’t see it. You see the cashflow, you see income and expenses, the cashflow is great, but you compound that with the fact that your wealth is rapidly increasing as the years go by because of inflation. That’s what makes real estate practically the most powerful investment vehicle available to the average person.
You have a great flexibility in how you do that. That’s why I created that resource Creating Win-Win-Win Solutions using real estate based asset liability management and strategies. You have the ability to focus in on exactly what you want to do. Do you want to be defensive? Do you want to be offensive? Do you want to have a balanced strategy? Do you want to take advantage of prosperity? Do you want to profit from crisis? Do you want to profit from ongoing low interest rates? Depending on your choices, once you understand what’s going on, you then have the ability to make optimal liability decisions that are going to change your real estate strategy and give you just a whole different way of approaching things.
A quick question about mortgage rates, one expert I know is predicting the possibility of 2% mortgage rates. In your mind, do you think that’s possible and maybe more importantly, do you see that as inflationary, deflationary or possibly both?
I don’t really see mortgage interest rates going to 2% in the near future outside of a crisis. If we get a crisis going, then there’s a significant chance that interest rates would go down substantially on mortgages. I would say the bigger danger in the near term is with the Fed having down to four quarter rate increases now. Of course the most recent one was last month. They’re talking about another one this year and four more in 2018. There’s the danger that mortgage rates may go up before they go down and of course, that creates dangers for the housing market.
That would be deflationary but I would think that a 2% mortgage rate would be inflationary from a price perspective because it would stimulate more construction, more sales.
If interesting rates were to drop, let’s say, by 2%, that would for a property such as real estate that are financed by those long-term mortgages that would be profoundly asset inflationary. The purchasing power of assets is increasing if on the other hand mortgage rates continue to climb, then we’d be looking at asset deflation in purchasing power terms that may or may not be covered over by price inflation over time.
That question was to set up my next question. There are people out there right now, they’re already ringing the warning bells of a housing market correction or even possibly a “crash” however, you and I both know that real estate markets are hyper-local in nature. What’s your perspective? Do you foresee a housing market correction or a so-called crash in parts of the US anytime soon?
I think it’s entirely possible. I’m not going to go out and predict that that’s necessarily going to happen. What we’re not certain about is what the Federal Reserve is doing. They’re playing some very dangerous games at the moment. The other thing to keep in mind is that the Federal Reserve has a long history of making mistakes and not realizing the mistake had occurred until this has already happened until the damage is already done. I think there is a distinct chance that particularly as you hit some of them more over-valued markets that already have significant affordability problems. In many cases, right now you can’t even do a cashflow positive investment there. If you’re doing a mortgage, it’s not just economically feasible. There is a certain danger that particularly in some markets that have really been going upwards, those are as we saw in 2008 the markets that are most likely to have a significant possible correction on the way if we do have increasing interest rates.
A couple of months ago, I sat down and met with the Lead Housing Analyst for the Federal Reserve. He started off with a presentation but then we had a good conversation about things. For the most part, they or he is fairly optimistic about the near future of housing across the US as a whole. They do see price inflation in the coastal markets as being somewhat concerning but nothing to be worried about too much. I have a slightly different perspective. I’m actually pretty concerned about the coastal markets, places like San Francisco for example where it costs $1 million to get a one-bedroom condo that you can’t even rent for let’s say $3,000 a month. That’s just insane. I really think there’s going to be some deflation with some coastal markets. We’re seeing in Toronto right now, which I know is not in the US, it’s in Canada, but in the last two months or so there’s been a drop of over 20% on the median home price. That is massive deflation in a very short term. If you annualized that, that’s over 100%. I am a little concerned about the coastal markets, this is why we, the Midwest down through towards the south, central, south and then over to the southeast is because numbers are making sense there and it’s still affordable. I think that’s where people have to focus going forward.
I think we both agree that there’s relatively mild inflation right now and we still have low mortgage rates. How do we as real estate investors take advantage of the current economic environment or conversely protect our purchasing power?
We need to take a reality-based look at the big picture things that are going on right now. I’ve been spending a great deal of my time over the last couple of years in particular in looking at what is happening with the national debt and also with the very rapid surge that we’re going to be experiencing in Social Security payments and Medicare payments starting by the late 2010s and into the early 2020s. We have some just transformative changes that are coming right at us at the very same time that we have a Federal debt passing $20 trillion and starting to accelerate beyond that. What those mean is that these factors of interest rates and inflation are actually going to become much more important in our day-to-day lives than they are right now. It’s become that much more important to understand them and it also really increases the incentives in learning and mastering alternative investment strategies such as real estate based asset-liability management strategies that can let us make choices in those times that are simply not available for let’s say conventional stock involved strategies.
What I hear when you say that is that the middle class, if they’re even as one anymore, is continually going to get squeezed. If you haven’t made the right investments, for me, my go-to and my favorite is income-producing real estate, if you haven’t started to build an investment portfolio in something that can protect you from inflammation and beat inflammation, I think you’re going to be left further and further behind in terms of purchasing power and the standard of living. Was that a fair assessment?
It is but I come in from a different angle than you do. You’re looking at asset appreciation. That’s a really good thing to look at and that’s something that you need to spend a lot of time getting good at and making the best possible choices there. I come in from a different angle. What I’m looking at doing is how do we survive inflation? How do we survive financial repression? How do we survive a combination of inflation and very low interest rates and somehow turn that to our advantage? The real key to that is focusing on the liability side. Then where it really all comes together is when you put that asset and liability together. This has not been traditionally what the middle class did to invest with. This is let me suggest a potential survival strategy when it comes to the years and decades ahead.
I agree with you and I think maybe we’re actually saying the same thing but in different ways because I always make the assumption that if you’re going to invest in income-producing real estate that you are acquiring that with as much cheap debt as you possibly can, an investment of great debt that will be inflated away because of inflation. Are we actually talking about the same thing here?
Close.
Enlighten me on what the difference is so I can learn.
You don’t necessarily do maximum LTV. It depends on the strategy that you’re attempting, that depends on where your place is in life. Someone, for instance, who is close to retirement and getting ready to retire to go pursue a maximum LTV approach particularly if they don’t have substantial financial reserves outside of that asset. It could be setting themselves up for a great deal of trouble. If you have substantial other assets and you’re younger, maybe the LTV shifts somewhat. My point is that, this goes back to my training, this goes back to what I was doing as an Institutional Professional Financial Analyst 30 years ago working with asset-liability management. It’s not like you just simply add the biggest liability on to the best asset that you can find, although obviously there are certain that are doing that. It’s understanding how the two work together and working the differential in both after inflation and after tax terms where the real sizzle comes in.
I totally agree. A person’s place in life, the risk tolerance and many other factors come into play as far as what they should be acquiring and how much debt they put on it. I do agree with you. For the most part, we are on the same page, it’s just we’re playing with different levers here as to how you go about doing that.
Dan, we can talk about these topics and so many others for hours. This have been a lot for some people and for other people it’s probably crystallized some of the things they already heard or knew and helped them out. For a lot of people, they probably are curious to learn more. I know you have a great newsletter. Maybe tell our listeners how they can find and/or your information and your books, your courses, your other stuff. I know you have a great website.
My central website is DanielAmerman.com. I have multiple layers of resources there. The first layer and if you put it all together is practically a book on its own. It’s entirely free. You don’t have to sign up for anything. Those are just the analysis articles that are there on the website where I take a look at things at the national debt and interest rates, I take a look, let’s say, at gold housing ratios and some of the information you can find there. That’s really intended to be a resource to help people out. To move beyond that, it’s necessary to go through a planned process where you learn things in sequence and they very deliberately build upon each other.
Something else that I found ten years ago is that works a whole lot better if you do it one paradigm change at a time. If you throw too many paradigm changes at a person on the same day, reality basis is they’re going to be lucky to retain one. What I do is I have this course that over time sends one idea to a person at a time. Each one of them has a potential for some people of changing their lives and by spreading them out in time, people have the chance to rope it over, think about it, look at headlines, look at their own situation and so forth before the next one comes along. That has been that free course Finding Wealth In Unexpected Places is the course I do that with. Then beyond that, I have an extensive body of resources I’ve been developing a number of different years that is available for purchase and that includes DVD courses and that also includes in-person workshops.
Dan, I can’t compliment you enough on the quality of work that you put out. It’s highly educational and easy to digest. I encourage listeners to go and subscribe and explore what else you have there. Dan, thank you so much for your time today. This has been very educational and enlightening. I certainly appreciate and I know our listeners do too.
I really appreciate you having me. Thank you, Marco.
What an amazing guy and a great interview. There’s a lot of digest here. Take advantage of his newsletter and free information. Also, if you haven’t done so already download The Ultimate Guide to Passive Real Estate Investing available at PassiveRealEstateInvesting.com as well as our mothership website, NoradaRealEstate.com. If you are interested in exploring real estate as an investment, as an asset class, set up a free strategy session with one of our investment counselors and we can spend a little time with you to find out where you are and where you want to go, how you want to get there, create a roadmap, define a criteria and then start executing on that criteria which is where the rubber meets the road and you start to add to your portfolio. If you have a question about real estate, click the Ask Marco button at the top of the Passive Real Estate Investing website. Let me know what’s on your mind, I will address it in the future episode of Ask Marco.
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