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Should Investors REALLY Be So Scared of Inflation? Maybe Not

Should Investors REALLY Be So Scared of Inflation? Maybe Not

4 min read
Paul Moore

Paul Moore is the managing partner of Wellings Capital, a private equit...

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“Inflation is coming! Inflation is coming!”

Let’s face it, friends and readers. Inflation isn’t coming.

Inflation is here.

Inflation has spiked in the past few months, and some say this is just the beginning. The Washington Post reported on it, too.

Some of us remember the trauma of the 1970s and early ‘80s inflation. We recall grandparents on a fixed income whose pension checks—formerly enough to cover two months’ mortgage—only covered two weeks. It was painful. And scary. Those of us who remember the gas lines and trauma of those days assume inflation is always bad.

Ronald Reagan seemed to think so. He said, “Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hitman.”

So, inflation must always be bad, right?

Yes.

For the uninformed.

But that’s not you. Hold on.

The great economist John Maynard Keynes had some nasty things to say about inflation: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a manner which not one man in a million is able to diagnose.”

Inflation is settling in. The value of your dollar is dropping. And it’s likely the government isn’t being straightforward with its CPI (Consumer Price Index) calculations.

Oh, and have you noticed that they’ve printed about 30% or more of all the cash ever produced since COVID-19 hit?

Check out the M1 Money Supply.

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Let’s face it. The news does not look good.


More on inflation from BiggerPockets

The good news for real estate investors

You can’t change this situation. You may hate it. You may be angry about it. You can curse the darkness until the cows come home, but it’s better to light a candle.

As a budding or mature real estate professional (I know because you’re on BP), you can align yourself with the two most powerful human forces on the planet to ensure you prosper during whatever happens. In good times or bad. What are those two forces?

Governments and central banks.

How do we do that?

Well, the U.S. government has a massive fixed debt with a very low interest rate. They need a way out. By devaluing the currency, they inflate the value of everything that is measured by that currency.

Without harming anyone, you and I can align with these powerful forces by doing something similar. While the interest rates are still low (which may not last much longer), we acquire fixed, low-interest-rate debt on assets that will significantly increase in value when measured by the declining dollar.

It’s not rocket science. But following this strategy may pay more than a NASA engineering gig. (It’s the simple things that often create the most wealth.)

Fixed-rate debt during inflation

Governments and central banks are often run by incredibly greedy people who harm the poor to line their own pockets. Without harming the poor, or anyone else, we can align ourselves with these two powerful forces by wisely using fixed-rate debt to invest in appreciating hard assets. And we can become incredibly wealthy in the process.

A property owner’s largest expense is often their mortgage. As a result, many investors think their best play is buying with cash or paying off their mortgage early. But that limits investors to only owning the properties they can afford to buy with cash.

Property owners can lock in their highest expense by using fixed-rate debt, particularly in a low-interest-rate environment. As inflation heats up, rents go up. And revenue rises correspondingly. Other costs go up, but as revenue rises against a fixed mortgage expense, profits expand.

And expanding profits lead to higher asset values, which can lead to the chance to extract equity tax-free along the way, which can provide down payments on more properties. Even if your wealth only seems to increase nominally (in name only since dollars are worth less), your equity extraction allows you to multiply your holdings and thus your nominal and real cash flow.

It’s a beautiful thing.

And you don’t need an advanced degree to pull this off. You don’t need millions of dollars. And you don’t need to quit your day job.

As a landlord, you can raise rents to keep pace with inflation. Your banker cannot. The expanding gap reflects your growing profits. And like I said, the extraction of equity for other projects compounds your wealth. Check out this brief analysis from BiggerPockets’ Dave Meyer.


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Inflation winners and losers

That same Washington Post story discusses winners and losers in inflationary periods:

Winners: “The key winner from inflation is anyone who holds debt because it is cheaper to pay back. People who own land and their homes also don’t mind because their costs generally don’t rise as much. Finally, governments tend not to mind some inflation because it makes debt look cheaper.”

Losers: “Businesses working on fixed contracts also suffer big losses because they cannot pass along the higher prices to their customers. Many small businesses are expressing concern that it is harder for them to adjust prices, for example. Retirees and people with a lot of savings also tend to suffer because inflation makes their money worth less. They can’t buy as much.”

If your goal is to stay in Dave Ramsey’s good graces, please ignore this article. It will only serve to irritate him, and he might even unfriend you.

But if your goal is to create a fortune by safely leveraging real estate with low-interest, fixed-rate debt, that opportunity may be right in front of you.

“Inflation is here! Inflation is here!”

Bring it on.