“There are only three ways to meet the unpaid bills of a nation. The first is taxation. The second is repudiation. The third is inflation.” Herbert Hoover
What is the best place to put your hard-earned resources?
These days, the Federal Reserve is saying 4-6% inflation may be transitory.
The developments happening are really interesting.
Especially during a time of inflation.
Whether inflation is transitory or long-term, I want to look at real estate and see how it acts as an inflation hedge.
We’re gonna look at large multifamily real estate and how it looks for your investments.
Owning Cash Flowing Assets During Inflation
Owning cash flowing assets during times of inflation is ideal.
It’s one of the best investments around.
So why is this?
Why are cash flowing assets great during times of inflation?
My friend George Gammon has this strategy that’s called the 10-80-10 strategy.
With this strategy, you divide up your investable net worth.
You put 10% in gold or silver, 80% in cash flowing assets, and 10% in speculative investments.
I want to focus right now on the 80% in cash flowing assets.
Why is it important to have 80% of your investable net worth in cash flowing assets?
Well, for a couple of reasons!
One is that the assets actually pay you to hold them and they generally rise with inflation.
We’re going to look for a minute at real estate.
Single family real estate has some disadvantages.
It really goes up and down based on the market.
A large multifamily property keeps pace with inflation.
We see rents consistently rise over time.
Why is that?
In times of inflation, you have higher costs, so repairs are higher.
Material costs are higher.
It’s more expensive to hire staff members.
The cost of ownership goes up, which generally leads to higher rent.
That all gets passed down to tenants.
So you have this link between inflation and rents.
It’s not an exact timing, but it generally happens over time.
I want to share an example that talks about how this works in the apartment business:
We bought a multi-family apartment building a couple of years ago for $11.2 million.
The building is in the Southern US and has over 200 units.
We recently got an offer for $19.5 million.
That’s a 74% increase in the value in just a couple of years!
How did that happen?
You can say asset prices are going up, which is true.
But the income and rents at the property have come up as well.
In this particular deal, we put about $3 million down.
We’ve dramatically increased the value of the property by doing renovations, increasing rents, and creating a great experience for our tenants.
Owning cash flowing assets really is phenomenal.
Multi-family units are not the only kind of these assets!
There’s also self-storage, mobile home parks, and even businesses.
These will all generally keep pace with inflation.
Why is Inflation Getting Worse?
40% of all currency in the U.S. was printed in the last 18 months.
That’s a lot of money printed in a very short amount of time.
We’re starting to see some inflation because of this.
The government is also passing large spending bills that are only going to continue.
What happens when you continue to print more and more money?
In the last 20 years, there’s been a 400% increase in the US money supply.
This is staggering!
From 2001 to 2021, things could cost 4x as much because you have 4x the currency out there.
They could, but they don’t.
So why haven’t we seen all prices rise by 400%?
It takes time to see things increase in price.
We’ve seen it happen before.
In the US, there was a lot of government spending and money printing in the early 70s.
We also went off of the gold standard during this time.
It wasn’t until the late 70s/early 80s that we actually reached inflation of 18-20%.
Now, how does this all relate to inflation hedging and multifamily investing?
I’m glad you asked!
How Does Multifamily Perform During Inflation?
Value increases over time while the value of debt decreases.
This can make you very wealthy, particularly in times of inflation.
Inflation is not your enemy; inflation is your friend.
Go ahead and give inflation a big hug for me right now!
How does value go up like this?
How does this naturally happen with apartment buildings?
Inflation typically rises, which puts pressure on rents.
Rents tend to go up and then the value of a property will increase over time.
In the multifamily asset class, there is generally between 7-8% annual return on investment.
When you look at the value-added component, you say you want to increase some value.
What our group does is attain working-class apartments and renovate them.
After we do some work, we see an increase in rents, which drives the value of the property up over time.
Remember: When the value of property increases, the value of debt decreases.
How does this debt actually go down?
There are a couple of ways.
The first thing: You’re paying off these debts with future dollars.
Isn’t that awesome?!
You can borrow money today and pay it off in the future when dollars are worth less.
These debts can last anywhere between three to ten years.
If you have a house, you can use a 30-year debt.
Over time, the payment doesn’t go up and you’re not paying more money.
Even though inflation is going up, you’re still paying the same amount — hopefully on a fixed rate if you can get one.
Over time, you owe less.
The balance of this debt will typically go down over time.
As an example, I want to share with you how this can work:
Let’s say you buy an apartment for $10 million.
Now, you probably don’t have $10 million dollars lying around.
You don’t need to!
Oftentimes, investors come in and put everything together.
We can buy a building and put around $2 million down on the property.
Over time, we see the value of this property increased to $12 million.
That sounds like a 20% return, right?
What would you say if I told you it’s actually a 100% return?
You put $2 million down.
Now it’s increased by $2 million dollars.
That’s a 100% return!
You can even use leverage with this, which can really increase your returns with an asset like multi-family housing.
Now I want to hear from you!
What are you invested in that you’re really excited about during times of inflation?
Let me know in the comments!
And before you leave, make sure to check out our special report about investing. It compares the stock market to real estate, and it also includes how the pandemic affects your investment future.
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