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BY INFLATION DEMYSTIFICATION EXPERT DAVID CAMPBELL- FOUNDER OF HASSLE-FREE CASHFLOW INVESTING
I was recently a faculty member on the 2012 Investor Summit at Sea, along with notable faculty members Robert Kiyosaki & Kim Kiyosaki (Rich Dad, Poor Dad), Rich Dad Advisors Ken McElroy and Tom Wheelwright and one of my favorite authors G. Edward Griffin (Creature from Jekyll Island). One of the topics we discussed on the cruise centered around currency devaluation as it relates to investing in leveraged real estate.
As we've discussed before, there are five ways to make money with Hassle-free Cashflow investment real estate:
1) Cash throw off - the amount of rental income left over after you pay all of the expenses and the mortgage on the property
2) Income tax savings - the amount of money you would have paid in income taxes if you did not enjoy phantom losses from real estate deprecation
3) Amortization - the portion of your mortgage paid by your tenant that makes your loan balance smaller
4) Inflation - the increase in the ratio between the intrinsic value of real estate and its value as denominated in a currency (price increase)
5) Appreciation - the increase in the ratio between the intrinsic value of real estate and its value compared to other objects with intrinsic value (value increase)
It is possible for an item to appreciate and go DOWN in price. For example, if you bought a house for five Toyota trucks and sold it for six Toyota trucks, you have experienced appreciation because your house was sold for more trucks than it was purchased for. However, if the price of Toyotas has gone down, you may have experienced a monetary loss. If you bought a house for five Toyota trucks and sold it for four Toyota trucks, your house declined in value. But, if the price of a Toyota truck went from $25,000 to $40,000, you would have purchased a house for $125,000 and sold it for $160,000. Home appreciation is nice but it doesn't mean we will have made a profit. As an investor who borrows money to purchase houses, I need my assets to INFLATE in price regardless of whether they APPRECIATE.
I have been investing in real estate since 2000 and because of my hard work, tenacity, and skill I am now a multi-TRILLIONAIRE. As a reminder of this insane wealth, I carry a fifty-trillion dollar bill in my wallet. OK, so it's really 50 trillion Zimbabwe dollars which is not enough to buy a can of Coke (Z$50,000,000,000,000 = $0.40 USD), but it is still fun to say "I am a trillionaire". Carrying this bill around in my wallet is a great reminder to me of how wealth is transferred through inflation. This Z$50,000,000,000,000 bill was also a gift from one of my mentors Ken McElroy so this bill has sentimental value to me.
Let's examine Zimbabwe's case of extreme inflationary wealth transfer in a whimsical real estate analogy. If you were smart enough and able to borrow Z$600 billion (Zimbabwe dollars) in 1980, the proceeds of the loan would have allowed you to purchase every single home in the city of Orlando, Florida (population 128,000). Twenty-eight years of inflation later, in 2008, you could have repaid the entire Z$600 billion debt with eighteen chicken eggs. Imagine how much real wealth was transferred through the inflationary actions of Zimbabwe's central bank. While extreme, this is an example of how inflation transfers things with intrinsic value to people who purchase them with debt denominated by an inflating (fiat) currency. Every government in the history of the modern world has radically devalued (inflated) its currency over time; the US dollar is no exception.
The answer is shockingly obvious. Banks don't lend out their OWN money. Banks lend out YOUR money. Banks make a profit by lending money at a rate of interest higher than the miniscule amount of interest depositors like you have leant it to the bank for. Your savings account at a bank is an asset to you and a liability to the bank. The banks owes you your deposit back, right? That makes the bank a borrower. Banks are not adversely affected by inflation because they make the spread between the income and expense of your money. The risk of inflation is borne entirely by the depositor not the bank. In fact, banks prefer inflation because as inflation pushes up asset prices the percentage of loans that default is reduced and the size of their loans increases.
Who are the biggest borrowers in the world? Governments and banks! The rules of the currency (inflation) game are made by the same people who have the most to gain from inflation - governments and banks! Expecting the inflation game to change is like expecting the fox in the hen house to stop eating chicken dinners.
Inflation allows governments and banks to reach into your pocket and take your money without your consent. The only way to protect your family from this virtual home invasion robbery of your currency is to be a co-conspirator in the inflation game.
Borrowing at a low rate and investing at a higher rate is called arbitrage. Arbitrage is the best wealth preservation and wealth creation tool there is. Investment real estate whose income is greater than the cost of funds borrowed to purchase the real estate is my favorite form of arbitrage (CAP Rate > Interest Rate). Leveraged real estate generates profits as the asset price (purchase price) increases with inflation and the effective cost of the debt decreases with inflation.
You cannot escape inflation unless you are investing with other people's money the way that banks and governments do. To protect your family from inflation, you MUST be a borrower of good debt.
How can you make these concepts work for you? Ask us! Our integrated team approach to financial planning focuses on people and their unique resources.
Visit our website www.HassleFreeCashFlowInvesting.com to learn:
1) How to explore your access to Cash, Cashflow, Credit, Equity, Time, Skills, Knowledge, Credibility, Strategic Relationships, and Access to Deal Flow as they relate to real estate investing and your primary job or business
2) How to articulate your financial targets and personal investment philosophy
3) How to determine whether you need to be in wealth accumulation mode or redeployment mode for sustainable financial independence
4) How to customize an investment plan that is consistent with your financial objectives and personal investment philosophy
If you are struggling putting your real estate investment plan together, let's talk. Our team believes that properties do not have problems, people do. We take a people-centered approach towards finding creative solutions for real estate investments and the people who own them.
Real Estate Investor / Developer / Financial Mentor
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