Mon, 20 June 2022
For many, it’s become a scary world with $5-$6 gas, soaring food prices, spiking rents, the medical system is still a mess, and wages aren’t keeping up with inflation.
Inflation is at a 40-year high of 8.6%. The Fed raised rates ¾%, the biggest jump in 28 years.
For every $1M in real estate debt that you have, you’re benefiting $86,000 each year due to your debt debasement.
Affordability has become so bad for wannabe first-time home buyers that increasingly, they’re becoming your renter.
Many project rent growth to exceed home price growth this year. Rent.com’s Rent Report shows a 26% annual rent increase nationally.
Every 1% in a mortgage rate increase decreases a buyer’s purchasing power by 12%.
GRE’s COO Aundrea Newbern, MBA joins me. We discuss our favorite RE information sources.
Aundrea expects to diversify her RE portfolio into more markets. She’s been focused on southeast Georgia.
Some RE resources we use: www.city-data.com, US Census Bureau data, CNBC.com, HousingWire.com, FRED data, the MLS, AirDNA.co, GREmarketplace.com.
When considering adding to your RE portfolio, simply talking to a Property Manager can be more valuable than the best website.
Aundrea sees a balanced market at prices $250K+, and a sellers’ market at prices below $250K in southeast Georgia.
Days On Market (DOM), Sale-To-List Price Ratio discussed.
LTRs are in high demand and low supply. STRs are saturated in many markets.
Rent.com’s Rent Report:
Get mortgage loans for investment property:
RidgeLendingGroup.com or call 877-74-RIDGE
JWB’s available Florida income property:
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Partial transcript: Welcome to GRE! I’m your host, Keith Weinhold. There’s so much to pack into one show today - inflation at its highest rate in over 40 years, the Fed raising interest rates the most in 28 years, rents are going up fast, then GRE’s COO Aundrea Newbern & I on our favorite REI resources. Today, on Get Rich Education.
Welcome to GRE! From Auckland, NZ to Oakland, CA and across 188 nations worldwide. This is Get Rich Education. I’m your host, Keith Weinhold.
Before I discuss real estate, what’s happening with inflation & interest rates is so exceptional that I want to cover this first.
When the latest inflation reading came in at 8.6%, it dashed hopes that it's peaked. We have no evidence that it’s peaked.
And as I like to say, that 8.6% is just the level that the government is willing to admit to. It's really higher.
It's the third month in a row that it has exceeded 8%.
Treasury Secretary Janet "Grandma" Yellen has already warned of what she calls "unacceptable levels of inflation".
And Yellen looks like my late Grandma Weinhold. Yeah, they look a lot alike. One difference though, is that Grandma was not wrong about inflation.
Another difference between my grandmother and Yellen is that… Janet Yellen never gave me Star Wars action figures on Christmas like my Grandma did.
Well, for many people, especially in the lower middle class, it's become a scary world with devastating $5-6 gas, soaring food prices and spiking rents. (I’ll get to that shortly). The medical system is still a mess. Wages are up perhaps only 5%.
Their quality of life is really suffering now.
Libertarians point out that fiat inflation is theft of one's private property. You earned a dollar. Now your prosperity has been stolen.
Sneaky shrinkflation is stealing from you too. Yeah, you're not imagining it,
Gatorade has trimmed its 32 ounce bottles down to 28 ounces. A small box of Kleenex has shrunk from 65 tissues down to 60.
Package sizes are shrinking faster than Lake Mead, all while producers charge the same price or more. That’s what shrinkflation means.
It's become an awful economic malady for consumers.
So, let’s talk about higher interest rates since that’s what can keep inflation from soaring.
Many interest rate types are based off of the Federal Funds Rate.
Now, I like to look at history to see what typically happens in like scenarios. History doesn’t tell you everything, but many people don’t look at it.
Rewinding three years, this rate was hiked up to 2.5% by early 2019… and the stock market was freaking out by then. Trump even demanded a rate cut. He got it and that, turned stocks around.
Yes, Presidents are supposed to stay independent of the Fed, but, in any case…
Just last week, the Fed Funds Rate was raised up to 1.75%... and the stock and crypto markets have already taken a swan dive off the high board.
Everyone thinks that rates are going to be raised again at the next Fed meeting next month.
So how do you think that equity markets are going to like that? History shows us that they don’t.
But see, history shows us that even when the Fed Funds Rate is raised to 10%, it can take years to quell inflation.
Commodities like housing, food, and energy, often excel in either inflationary times or recessionary times.
That’s where you want to be. Buy & own what people need, not what they want.
These things have a finite supply. Bringing them into existence takes "proof of work".
Proof of work means that it takes real world resources to extract or produce something—like framing roof trusses, growing timber for lumber, mining gold, extracting oil, or growing wheat.
If you held any of these commodities individually, you might merely hedge inflation.
But if you can control an entire commodity by only putting one-quarter or one-fifth of your "skin in the same", then you get to short the dollar too.
"Shorting" means that you're betting that something is going to fall in value—the dollar in this case.
Now you're creating leverage and arbitrage. You're really profiteering from inflation ehre.
Real estate is like a basket of commodities. It is made of: lumber and copper and glass and all kinds of commodities.
So, if you have $1M in real estate debt, it's now being debased at a rate of 8.6%. Great.
This effect alone has increased your prosperity by $86,000 this year—$86,000 this year alone, and that’s besides appreciation, income, tax benefits, and amortization.
Yeah, you’ve got an $86K tailwind.
Do you remember back in 2019 when I did the podcast episode called The Debt Decamillionaire? It was Episode 260. You might remember that episode.
That's when I touted the counterintuitive merits of taking out $10M in real estate debt... with the payments outsourced to tenants.
Now, I know that not everyone has the wherewithal to do that. But if you were able to implement that plan, it has now created an extra $860,000 of annual wealth for you.
Yes, as one of just five ways you’re paid.
If you think that sounds scary - or unconventional - it’s definitely unconventional. Because being conventional gets one nowhere.
So, though you might have not been able to amass that much good debt, I was ahead of the inflation, helping you get out in front of it to take advantage of it. Of course, I talked about it well before 2019 too.
And, no, I sure didn’t know that a pandemic was coming in 2020 and it was going to bring all this inflation this quickly… but that is how things worked out.
Now, if you’re uninitiated on this, if you originate $10M in loans, understand something. Your net worth didn’t just decrease by $10M on the day that you got the loan.
The day that you originate the loan, what happens is that you’ve now got $10M in your asset column and $10M in your debt column.
Leverage amplifies the $10M in your asset column… and then your debt column erodes through both tenant-made principal paydown - and this higher inflation.
Maybe I’m stretching your thinking just merely by discussing 8-figure debt like that.
So why is someone really compelled to be a real estate investor today?
One big reason is that soaring inflation is going to be around for a while.
So last Wednesday, when the Fed raised interest rates three-quarters of 1% - their highest daily increase since 1994.
Understand that higher interest rates decrease demand. There's another name for substantially decreased demand. That is called a recession. I don’t know if we’ll get that far.
Now, capitalism is not inherently inflationary.
Sure, as employers' demand for labor rises, that's inflationary.
But as businesses compete to offer goods and services at the lowest price - which is capitalism - that's deflationary.
Libertarians are quick to point out that America has too much government intervention to be considered a truly capitalist economy anymore. That’s a different conversation.
But some have speculated that politicians are plotting another stimulus check drop on American citizens so that they can deal with inflation.
I really hope that they do not do that. Sheesh, this would be a policy blunder. This would be like shooting a man that's already dead.
This absurd approach of "printing up currency" would be to help people deal with the consequences of... "printing up currency".
If you think that’s preposterous, well…
Quebec is actually doing this. They're issuing $500 stimulus checks to help the Canadian province's residents deal with inflation.
Yeah, that’s really happening.
Soaring gas prices aren’t just painful for summer road-trippers. Because fuel is a critical input for so many goods and services, higher costs are causing havoc across the economy in a lot of places that you wouldn’t expect it…
Aviation: Airfares in the US skyrocketed 19% in April from a month earlier, an increase that is almost exclusively driven by a jump in jet fuel prices, United CEO Scott Kirby said. Now, you might have expected that one. But get this…
Law enforcement: A sheriff’s department in Michigan instructed its deputies to cut back on visits for non-urgent calls because it had blasted through its fuel budget with months remaining until a new one kicks in. (Yeah, inflation affecting law enforcement!)
Emergency services: An ambulance crew in Pittsburgh said it was limiting its service outside of 911 calls after facing a similar budget crunch. Its fuel expense for the full year is typically $50,000, and it’s already got close to that entering June.
Landscaping: Lawnmowers and trimmers use gas to make your front yard the envy of the neighborhood. But after absorbing all of the cost increases they can, some landscapers have slapped a surcharge on customers, and others are even looking into electric mowers and propane as an alternative fuel.
In any case, a look at history tells us that we could be in for high inflation for a full decade.
So make financial decisions accordingly.
Risk assets are typically really sensitive to big moves in inflation and interest rates.
Major stock indices are down, down, down.
And cryptocurrencies are in an all-out historic meltdown. They’re more volatile than stocks, and many have lost 50%-60%+ of their value just this year.
Crypto trading platforms have halted withdrawals
Companies cut jobs
Panicked investors dumped their holdings
The public is finally dismissing promoters' claims of "Hey, I made $50k on doodoo coin. So you can you!". You don’t really hear that lately.
Let's Go Brandon Coin, now worth $0.00. And “Let’s Go Brandon” coin makes Dogecoin look like some sort of respectable family heirloom.
I actually still think bitcoin could have some potential, but…
So then where to look? Where do you go for yield today?
Some feel that the "true rate of inflation" is 15% today. Then that's how much prosperity you lose by storing cash.
(I believe it's wise to hold at least 3-5% of your real estate portfolio's value in cash.)
One place could be oil if you think there’s still a runup to be had there. But oil has performed well so far this year. Gold still hasn’t really awakened despite inflation.
What you can do… is…
Follow the money. Big institutional buyers like American Homes 4 Rent keep plowing money into real estate, especially single-family rental homes.
That’s historically the place to be in times of either high inflation or a recession.
Though the institutional share is increasing, the overwhelming majority of homes are still bought by individuals just like you.
In the fourth quarter of 2021, institutional buyers only comprised 18% of home purchases.
As affordability clamps down on wannabe first-time homebuyers, unfortunately, many of these fine people never make it to the closing table.
Every 1% in a mortgage rate increase decreases a buyer’s PP by 12%.
Mortgage interest rates are now 6%+ on OOs, about 7% on rentals. I believe that the only way houses are going to get more affordable anytime soon is if mortgage rates come down. That’s because home prices aren’t coming down anytime soon.
So what do these priced-out people do? Increasingly, they become your renter.
Rent price growth is predicted to outpace home price growth this year.
Though some measures are lower, Rent.com's Rent Report shows an astounding 26% annual national rent increase.
While a lot of major markets are struggling with a streak of Fed rate hikes that could drag on longer than the final two minutes of an NBA game...
...for real estate investors, the rent just keeps flowing in.
And here’s what it comes down to. Picture this. Like I’ve discussed before, first home prices rise, and then rents follow later.
Picture two waves. Say that these two waves are 18 months apart. The first wave is home prices. Today, prices are still climbing but the wave has likely crested.
That second wave that’s coming in now are the torrid rent price increases.
The trough between the two waves is where the cash flow is worst on new purchases.
And now the second wave - that rent increase wave - is building.
That’s the ah… seafaring here in the rental housing market ocean if you will.
Hey, In the past, I’ve discussed where I’ve invested and what RE types I like to own. Why don’t we hear from GRE’s own COO Aundrea Newbern, MBA about how she’s positioning her portfolio in this environment of normalizing prices & spiking rents.
Also, she & I will discuss some of our favorite resources & websites for real estate info. That’s straight ahead. I’m Keith Weinhold. You’re listening to Episode 402 of Get Rich Education!
Yeah, great stuff from Aundrea, as always.
We discussed markets. Of course, it’s about the submarket too. As an example, maybe you don’t feel like Erie, PA or Toledo, OH or Grand Rapids, MI are fast-growing markets.
Actually, I think Grand Rapids, for one, is growing, but the point is, that even if a metro has a stable population but it’s, say, medical district is booming - like a lot of cities’ medical districts are… you may very well be better off in an OK metro with a booming medical SUBmarket than you are elsewhere.
It’s often about that SUBmarket within a metro that really matters to you.
There aren’t too many places that you can invest & get yield today. But high inflation is the motivator to do so.
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For everyone here… COO Aundrea Newbern, MBA, Content Manager Matthew Blunt, Producer - me &, Sound Engineer, Investment Coach Naresh Vissa, Website Marvin Diaz Jr, Advertising Jake Madoff, I’m your host Keith Weinhold.
Don’t Quit Your Daydream!