“The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation.” — Vladimir Lenin
Is now the right time to invest or should you be holding cash?
A lot of people, particularly retail investors, are holding cash right now.
I don’t think this is the right choice.
People are waiting to see what’s going to happen next.
If you’re holding cash, you’re losing around 35 to 40% of your cash over the next two years.
A confused mind might say: “I’m not gonna do anything!”
Ronald Reagan once said: “’Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man”
It will wipe out your wealth without you even realizing what happened.
There are two real approaches:
First, there’s the Grant Cardone approach, aka invest until you go broke.
Second, there’s holding cash and waiting until things go on sale.
I’ve heard investors say both.
Today I want to talk about why I think it’s way better to invest now rather than hold cash.
1. Saving is Losing
I want to start off by telling you a story from when I was eight years old.
My grandmother took me down to a local bank to help me open a savings account.
You may have had a similar experience.
Opening your first bank account is a noble thing, right?
Saving will get you to your financial goals.
Unfortunately, that’s not true anymore.
I’m grateful for the lesson, but saving is losing when you’re in a high inflationary environment.
I’ll say that again: Saving money is losing money.
I said before that 35% to 40% of cash will be lost over the next two years if it’s locked up in savings.
Think about how much money you would have sitting on the sidelines.
There’s an incredibly high holding cost for that cash – 15% to 17% per year!
That’s a pretty good return on an investment.
We see those often on our multifamily investments.
But with holding cash, you’re actually getting a negative investment.
Not only are you waiting, but you’re not getting a positive return.
There’s also a 30% to 35% swing in what you could be getting versus what you’re actually getting (potential investment returns of 14-16% plus inflation of 15-17%).
You may be waiting for the right moment to buy. If you have money sitting there, what’s going to happen?
You’re thinking, what if things go on sale?
What if prices crash?
Personally, I don’t think that’s going to happen.
We may have some modest reduction in prices, particularly in single family housing, but there’s so much cash in the system.
We created 40.9% of new currency over a 24-month period during COVID (Feb 2020- Feb 2022 – Source FRED).
With a multifamily deal, even if it underperforms, we’re still hedging inflation.
In this chart you can see that rents keep pace with inflation.
As long as the rents – which are what determines property value – keep pace with inflation, you’ll be in good shape.
You’ve probably also heard of investing in inflation hedge assets.
There are some assets people say are inflation-hedges when they’re actually not
There’s something called treasury inflation-protected securities, also called TIPS.
These are treasury bonds that say they will keep pace with inflation, but the official rate is around 9.1%.
If they pay you that amount and inflation is actually 15% to 17%, you’re still losing money in real terms.
I wrote an eBook about this exact subject.
It’s called How to Use Inflation to Your Advantage.
The eBook is basically a guide that talks about how you can get into certain types of assets.
You can use debt to help grow your wealth.
You can make inflation your friend rather than your enemy.
And the best part? It’s free!
Get your copy here.
2. Invest in Inflation-Hedged Assets
What does an inflation-hedged asset look like?
Rents and inflation generally go hand-in-hand.
When inflation happens, rents will rise.
Why is that important?
If I sell my house, the price is determined by what other houses in the area have sold for.
That’s not necessarily the case in commercial.
It’s dependent on how much income you can produce.
If the income (aka the rent) is going up because of inflation, having investments there can be a great call.
Where are the rents and values going?
Inflation is here to stay.
This means it’s a special time in multifamily.
The interest rates are far below 15% to 17%.
As long as your interest rates are below inflation, you’re doing pretty well!
We’re currently seeing 4.5% to 5% in large multifamily, which is amazing.
We’re also able to see that continue for a long period of time.
There’s a phrase called inflation-induced debt destruction.
My friend Jason Hartman talks about this.
Inflation-induced debt destruction is what happens if you buy assets with a lower rate than what inflation is.
Over time you’ll pay off that asset, like a piece of property, with future dollars that are worth less.
The property will be worth more over time due to inflation, but you’re able to pay the same amount.
This means the real dollar value will be worth less.
It’s a double positive!
I love being in debt because of this.
When rates are lower than inflation and you’re paying the debt off with future dollars that are worth less, it’s a no-brainer!
There could be a time where interest rates go higher than inflation.
We’re not there right now, but this is an amazing time to look at it.
I run a large meetup in Southern California on the first Wednesday of the month.
What I find is that a lot of people, including myself, have had analysis paralysis for years.
This happens when you would love to do something but you’re confused and don’t know if you want to commit.
But this is really the time to enter in and figure out how you can educate yourself.
I wish I had started sooner.
There’s a Chinese proverb that says: “The best time to plant a tree was 20 years ago. The second best time is today.”
Remember that when you’re thinking about this stuff!
That’s also a great segue into our last point…
3. Waiting is Also Losing
If I’m waiting, I’m losing 30 to 40% of the cash amount just sitting there.
This idea of “someday I’ll invest” leaves a lot of cash sitting on the sidelines with corporate and other investors.
Don’t be one of those people.
I have about 95% of my net worth in deals.
I’m using the cash that will be worth less in the future to buy things.
Is it worth a 35% to 40% haircut on the value of your dollars?
Will we really have that kind of crash in these commercial assets?
The National Association of Realtors did a study a couple years ago that said the housing market is 6.8 million apartment units short
Some would say it’s closer to 2 million.
The bottom line is: We need more housing.
Some people ask me – How is the real estate market? Contrary to popular opinion, there really is no real estate market.
Instead, there are different parts of the market.
Multifamily is a very different type of asset.
An advantage we’re seeing right now with a recent deal is the fact that we were able to negotiate a $1.5 million reduction.
That’s pretty amazing!
It’s become much more of a buyer’s market in a lot of ways due to rising interest rates.
How will you respond to that?
Now I want to hear from you!
How are you making inflation work for you?
Let us know in the comments below and grow our amazing community!
Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.
If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.
Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.