Inflation Induced Debt Destruction in Low Inflation Environments

Jason Hartman plays a clip from the 2019 Meet the Masters of Income Property event. Jason talks about Inflation Induced Debt Destruction and gives examples from the high interest rate period he originally used and the lower interest rate environment that people who purchased in the late 1980s have experienced.

Investor 0:00
You’re gonna laugh, but because of your podcast, we’re positioned. Well, I don’t know how else to thank you. But thank you, your podcast and your services are amazing. And I wish I could do more as far as working with you guys, but I haven’t really but maybe in the future, obviously. But once again, our family is grateful to you and your services. And your information is priceless. Thank you so much.

Announcer 0:27
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate Stay transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.

Jason Hartman 1:17
Welcome to Episode 1257 1257. I hope everybody had an awesome weekend. It is Monday, one of my favorite days of the week. I know that sounds strange. But when you were on your mission, you look forward to Mondays. I hope that Monday’s are good for all of you. I know some of you are dying to leave the rat race and get out of your job. And that’s what we’re here to help you with. So you can be on your mission. If you love real estate and you love income property, and you have an interest in it as more than just the road to financial freedom as more than just vehicle to get you there, then hey, you look forward to Monday’s as you build your wealth by following our plan, the plan that we have outlined on this show over the past 14 years or so, if you don’t love income property, but you simply look at it as the vehicle to financial freedom, then hey, you will be doing whatever your passion is, and your income property will be working mostly in the background, requiring just a little bit of attention. Well, your tenants toil away and give you and your portfolio 33 to 40% of their hard earned income every month. What other company gathers that much of someone’s income? What other business gathers 33 to 40% of someone’s income every single month. Only income property can Say that right only income property. You know, it’s it’s almost like you have a bunch of indentured servants working for you 33 to 40% of the time. Every month, your tenants work somewhere between 10. And about 14 days they work for you. Congratulations. That’s quite a wealth builder, isn’t it? Anyway, today, we will have a little live clip from our meet our recent meet the masters of income property event that we held in Newport Beach, California a couple of months ago. And the reason I’m playing this is even for those of you who attended that event, here’s what happens. It happens every time you meet the masters. And I kind of love it. And I kind of hate it at the same time. I’ll just tell you, it’s something I do not want to discourage. But as a presenter, it bugs me Just a little. So here’s what happens by Sunday afternoon. A lot of you are out of the room, you’re outside, you’re in the exhibit area, and you’re talking with our local market specialists, and our financing providers. And you are buying properties. Now, I love that because that’s business and we always welcome business. We’re capitalists over here, but you’re not in the room to hear what I’m talking about. There. The room literally sometimes 40% of you are outside, making deals and buying properties. And hey, I don’t want to discourage that. But as a presenter, it gets a little lonely when you see some empty seats in the room Saturday, and Sunday morning, the room is full. And so we are going to play some clips here over the next several episodes from Sunday afternoon when some of you had bugged out and you were out buying properties. So we’ll do that here in just a moment and I’m happy to announce that of course, we We have our cruise event coming up. And you all know about that already. Jason Hartman, calm slash cruise. We got a few more people that just signed up and are joining us. And I do want to mention that I have heard a couple of people express reservations. Now I have been on 10 cruises in my life. And I’ve been on a couple that I didn’t like very much. And the ones I didn’t like very much. Were those short I think I went on two of these, or those short, Mexico cruises leaving out of Southern California and going to Mexico for like three or four days. Those have the tacky cruise ships. And honestly, they have the tacky crowd. Yeah, I think that crowd is a bit tacky, because they’re these super low budget. crappy cruises. This is not one of those. This is a princess cruise. It’s a seven day cruise. It’s a high class cruise. You’ll like it. But here’s the other thing. I hurt. A couple of people asked me. What about the internet? And hey, I’ll tell you, that’s a big deal for me. I like to be connected. In fact, I like to be connected all the time. Some people say, don’t you just want to unplug? No, I don’t, I don’t like unplugging at all. I want to be connected to this universal mind of humanity, where I’ve got billions of people contributing knowledge. And when I want to look something up quickly, or I want to learn about something, or I want to visit a website someone tells me about I want to go right then. Well, thankfully, I selected this cruise our Canada and New England cruise coming up in October, because it has the fastest internet at sea. And it’s not expensive either. It’s called medallion class Internet, and it rivals high speed landline connections, or at least that’s what they do. TELUS Princess Cruises. And it says so right on the website. And I kind of doubt a big company like princesses false advertising. They retrofitted certain medallion class cruise ships in their fleet to this new high speed internet. And it’s inexpensive and it’s fast, and it’s all over the ship. So you can get it anywhere. And they’ve retrofitted several of their ships. Just about a year or a year and a half ago, I think they said to this medallion class, and that is very special. It’s the fastest internet at sea, they say, and I think you’ll really like that. So if you’re thinking, I gotta take time off, I gotta be disconnected. No, you’ll be connected on the ship, you can get stuff done. That’s what I love. And of course, we’ll be spending time at some ports and you’ll have the opportunity for coffee shops or whatever there as well. So don’t worry about that you will be connected and that is one of the big features That I personally look for the cruise. But what’s the other event? We got something else coming up? Well, we are doing profits in paradise in beautiful Orlando, Florida. Yes, the home of Epcot Center and Disney World. And that is coming up. We are waiting for the contract back for our October dates, right after our cruise going in and out of New York, for the cruise, then you can just jet right down to Orlando and come to profits in paradise. Or if you’re not going on the cruise, you can just come to profits in paradise. And it is going to be a great one this year. I’m about to announce a big famous speaker who will be giving two presentations at the event. And I think you’ll really like that. So that’s all coming up. But without further ado, let’s go to a live clip from Sunday afternoon at meet the masters.

Jason Hartman 8:57
I want to talk to you about sort of More main subjects as we wrap up the day. So, you know, in my investing strategy, if you could put the PowerPoints on the screen, I talked a lot about inflation, of course, and how significant that is, as an investing strategy. And you’ve heard me many times referred to inflation induced death destruction. You know, I, I give this example where I show you the inflation that really happened that affected millions of homeowners, and exactly what it did for them from the period of 1971 to 2001, or 1972 to 2001. Okay, so I thought, you know, we really need to update this example. And the example doesn’t work as well, because the inflation rate, I mean, it’s certainly been more manipulated. But I think it’s hard to say that it hasn’t been lower. I do believe inflation has been lower than it was during that 30 year period, but You know, if you count asset inflation, I think it’s actually probably been higher. And you know, it’s weird that in our world, inflation is only measured by consumer prices, the consumer price index, the CPI, right? Because there’s another very significant form of inflation, and that’s asset price inflation. But that’s not measured at all, except to the extent that it affects your housing costs of your personal house. But that asset inflation and you know, this is a theory I’ve talked about over the years, I think it really has a giant impact on the course of someone’s life. And in life, a lot of things can be related to the metaphor of the telescope. So if you have a telescope and you know, all of you have looked through a telescope at some time in your life, probably at the moon, right? If we all done this, you know, at least when you were a kid, you do this right? Pay attention. Come on, I know it’s late. Help the speaker out participate a little. Okay, so, so when you look at the moon through the telescope, what happens when you just accidentally bump the telescope, just a tiny little couple of millimeters or a centimeter, right? You know, half an inch, a half an inch pumping, that telescope will throw you way out into interstellar space, right? You won’t see the moon anymore. Now the moon is only 250,000 miles away only. And you know, the Earth is 25,000 miles around. So there’s how far the moon is just for point of reference. But you know, you’re not that telescope off just a

Jason Hartman 11:37

Jason Hartman 11:38
bit. And it changes a whole course. And the same is true of our life. You know, a lot of people that are sort of the want to be successful people. They like to think that successful people had a lucky break, or they had some big event happened, some miraculous thing you know, happen and it changed. The course of their life. It was like one of them. One big event, you know, winning the lottery, getting the promotion, some lucky break, right? And all of us real people know that this just isn’t the way it works, right? probably seen that thing past or evidence, social media. That is a little pencil drawing with a graph with, you know, the axis here and the axis here. And it’s this graph, and it says the path to success. You see this on social media, and it’s the line starts going like this, and then it goes, you know, like that. And then oh, success, you know, it’s a lot of twists and turns. And it’s a lot of really just hard work. That’s the reality of it. It’s not glamorous at all. And that’s what makes for success in real life. But a few key decisions can really set you on the course especially when you have something else that isn’t really directly dependent on you are your own efforts. Okay, now, you’ve heard me say many times, I believe that the idea of power income is complete bull. Okay. I don’t think it exists. cussing, right? Have you heard of Gary Vaynerchuk? Right? You’ve probably heard of him, he causes a lot. Okay? He’s He’s a famous motivational guy, right? And you know, he did this video, just this rant on all these people and he’s sort of in the internet marketing world. And in this internet marketing world, you know, there’s a lot of people who talk about passive income and sell passive income. Oh, just create this website and you will have passive income. Oh, Bs, you know, I mean, Tim Ferriss, right, the four hour workweek. Yeah, the book up there, although we didn’t talk about it. You know, an impactful book. I had dinner with Tim Ferriss just a little over a year ago, in Austin. It was a four hour dinner. I could you know, we had a four hour dinner. And Pat Donahoe went with me, spoke yesterday, and I don’t know Pat’s here still, and then Ryan Moran went as well. And so we have this for our dinner with Tim Ferriss. I bought it at a charity auction. And so he and his girlfriend took us out to dinner as a four hour dinner and a one hour dessert. So it was a five hour dinner. So we went to dessert a different place. But you know, Tim Ferriss doesn’t work four hours a week, okay? It’s just looking at, there’s marketing and there’s reality, right? But when the thing sort of works without us and without our own efforts, you know, Earl Nightingale many years ago, likened it to a cruise ship. And he said, look at, you know, a cruise ship and you’re all going on a couple of cruises coming up in the next year. So, you know, because we’re going with me, so we’re all going together. So you know, the cruise ship only goes maybe 20 knots, you know, give or take 20 miles an hour, right? And it goes very slowly. In an airplane, you get on an airplane and it goes 550 miles an hour, but the cruise ship just keeps going. It’s so persistent. It just those 24 hours a day. You sleep on the cruise ship, you party on the cruise ship you eat you sit out on the deck and get a suntan. And you know, it’s just moving all the time it’s moving. And there’s this progression that is always happening in a positive direction. And before you know it, you’re in a new port. Right before you know it, you’re in Cuba with us, okay, or you’re in, you know, Mazatlan or whatever, right. And so it’s a very consistent thing. And the reality is successful people are just very, very consistent, okay? And they don’t let setbacks. Take them out of the game, because life is really a game of staying power. And the beautiful thing about income property is it has all these multi dimensional characteristics that we all know and love, because we’ve been talking about it for years. And it’s just always working. It’s like that cruise ship. You know, when I started yesterday, and I talked to you about our Oh, a return on amortization. We talked about how that’s just working and working in Working in it doesn’t do much in the beginning. And but you get five years in does more, you get 10 years in it a lot more and 15 years, it’s doing a whole lot for you. Okay, it’s making a big difference, in addition to all of the other ways in which you earn a great return on your investment. And it’s all happening kind of like, just automatically like the cruise ship, it’s just moving all the time, right. And inflation is working in our favor all the time. Yet, it’s hurting everybody else who gets in playing our game all the time. So, you know, for better or worse, you know, it’s nice to say, well, the pie is big enough for everybody, right? You know, AOC would say, Oh, we just tax the rich. Elizabeth Warren would say the same thing. And the pie is big enough. The reality is, you know, yes, capitalism is a great concept and does make the pie bigger. There’s no question about it. The pie gets bigger. I mean, George guilders concept of knowledge and how it creates wealth and he says, Look, I mean, I don’t know if you really caught it what he said yesterday, right? And maybe he said it today again. But he said, every resource we have today on this earth was available to people living in caves. They all have the same resources. Arguably, they had more resources than we do now, because the environment hadn’t been destroyed yet. Right? Okay, so the same resources were there. But what made the difference? Well, this consistent progression forward of humans to learn and impact and change their environment and make it better. Every decision we make, I would argue, every decision we make is a decision to improve our condition.

Jason Hartman 17:42
That’s the nature of humanity to improve our condition, every decision. So growing the pie, so economics is a relative thing. Okay. And you know, during the Great Recession, when things look really bleak and really bad, and everybody was worried that well, you know, Everybody’s going to end up broke the world is coming to an end. And I don’t know, you know, try and remember how really devastating and bad The news was in 2008 you know, 11 years ago. It really did seem like the world was ending. I mean, if you think of it, the country of Iceland went bankrupt. A country, okay, literally became insolvent. Okay. It was a giant thing. So the economic pie is relative. And regardless of how wealthy any of us become, it is a relative game. So all we have to do is be ahead of most others. You know, like that old story of the bear in the woods. bearers coming at the two hikers and one stops to put on his tennis shoes. And, you know, the other one says, You can’t outrun a bear man, a bear can run 30 miles an hour. He says, I don’t have to outrun the bear. I just have to outrun You, you know, and then I know you forgot his trade story, right? But it’s true, that is true. So even if nothing on the performer comes true, and it’s never as good as we expect, all we have to really know is that we are outperforming how most people invest. And we’re getting ahead. Okay. You know, even I mean, you’ve heard me say many times that Bernie made offs big promise was I can make you eight to 12% consistently in my Ponzi scheme, or you didn’t say that came out later. But you know, that was considered phenomenal performance. Okay. And, you know, you look at any of the performance on our website, because income property is so multi dimensional, it has these great characteristics. You look at any property on that website, when I doubt there’s any property there that has a perfect a return of less than 25% annually. So even if it only works out half as well, okay, you’re going to make 12 and a half percent, because it’s got so many advantages that other investments don’t have the multi dimensional characteristics. And remember, on that first year performance, it only counts the first years are oae or return on amortization. It’s not showing you your five or your seven or your 10 or your 15 when it really starts to chunk away like I showed you on the graph yesterday. So it’s not showing that and it’s also not showing, I need the what is IDD most of you know, right, what is it? inflation induced debt destruction, the Holy Grail, the thing that’s hidden under the iceberg. So when we look at the last 30 years 2018 back to 1989. Let’s just take a look at this. And this is waiting less impressive than the other example. I’ve given for many years. And that other example coming from Dan Ammerman. So during the 1989 World Series. I don’t know if you remember, there was an earthquake, remember, and a damaged stadium and that was kind of like a really big deal. Okay. In 1999 they released this movie with the Worst Actor in history, Keanu Reeves. Okay. I mean, that guy sucks. He’s worse than Oprah. Oh my god. I don’t know why this movie ever became a big deal. I never got into it. But, you know, I could stand up here and say, Did you take the blue pill or the red pill? Or Isn’t that how it works or whatever the differences anyway? So you know, that movie was like a big deal. Why is that such a big deal? why he’s Why is the matrix a good movie? Please tell me because I don’t get it. Okay, go use a new technology to kind of circumvent the acronym. Okay, a brand new

Jason Hartman 22:05
idea that there could be something else bigger than what we see in our. Yeah. And that’s definitely true. Yeah. You know, now that you mentioned that that’s another good point. How much time do we have? We have time. Okay, so. So that’s another good point. Because, you know, we don’t see so much that is going on in the world. And think about it. You know, I always say watch old movies and watch old TV shows. To gain a perspective, you must gain a perspective. And this is like, you know, you’re you’ve all dealt with and maybe you were this person, I probably was too young. No at all. Okay, you know, who knows everything, but has like no experience and no points of reference, but they know everything. They’re usually a teenager. They just don’t see it. You gotta watch old stuff, to just remind yourself of how it used to because it’s so easy to forget that perspective. But think about it. You know, Carmen will tell you. I have a crush on Audrey Hepburn Yeah, I usually have a crush on dead women. So yeah, there, she got a look at her. I say you gotta see Breakfast at Tiffany’s. It’s such a good movie, right? And so, think about it back in 1964 whenever that movie was made, what 60 apparently you’re a fan too.

Jason Hartman 23:23
But you know, if you said, Hey, in the future, we’re going to have this little computer in our pocket that does all these things this does, right. And this little computer will be hundred times more powerful than all the computers. NASA would have. Nine years later, when we landed on the moon, if we really did, it might be a conspiracy, but who knows? That would have seemed like magic to them. Right? That would have been magic. I mean, it’s, it’s like and think about all the things that we think we know now that in the future in 10 years and 20 years. We’re going to think you know what? The future brings, it’s going to be like magic. We can’t even imagine what we’re going to see yet, right? We can’t even imagine. We don’t know. So we go forward 10 years at a time over this 30 year example, right? 1989 1999 the movies aren’t getting any better. 2009 Michael Jackson passes away. And you know, you can’t see anything on the news except that. And so, you know, that just gives you a point of reference over the last 30 years, and most of you are there. And if we look at inflation and do stead of destruction, how did that play out over the last 30 years? Now, again, this is not a theory. It’s a fact. And it happened to 10s of millions of people. This is not some esoteric concept, you know, that you hear about from some liberal left wing professor in an ivory tower, okay. This actually happened to people, okay. And here’s what happened. Okay. Here’s the old example I’ll just go through real quickly, you’ve all seen this probably, you buy the average house in 1972. For $18,000, I’m looking up in the green part at the top, you get an 80% mortgage for 14,000. And change the interest rate back then in 1972 was 7.37%. You borrow that money for 30 years. First row there, you know, unfortunately, with these bright, awesome, beautiful screens that are magic, the laser pointers don’t work because they’re so bright, you can’t see it on there. But, you know, just going over here to this first row 1972. That’s the inflation rate $1 is worth $1. And these are the annual payments on this $18,000 house or $14,000 mortgage. These are the inflation adjusted real payments, what you’re really paying in real dollars, and that’s the monthly payment. And let’s not worry about this. Okay. So you go forward 12 years to 1980 And now this 19 $72 only worth 40 cents, okay? It’s only 40 cents in real value, you’re still writing a check all along for the same amount every year, which is, you know, basically one on one per month, okay? times 12 months of the year, close enough for government work, okay? But the value of that dollar keeps declining because of inflation. Okay, so you are now paying less, both in monthly payment and the mortgage balance is being decreased by inflation, that’s inflation and do step destruction. Okay. So then if we just go to the end of that term, and we see that by the time that mortgage is paid off, the average inflation rate is 5.1% over that 30 year period, okay? The 19 $72 now worth 24 cents, because has diminished the value of the dollar, you’re still writing that last set of checks for 1200 and $11 per year. Okay, the monthly amount used, you’re still writing the check for one on one per month, but the real value of it’s only $24. Okay, because inflation has diminished the value of it, right? Coco get away from that food. That’s right. Okay, but what really happened to these people to millions of people not a theory at all, is they thought they borrowed $14,614 by the time you added interest, they actually paid back in nominal dollars in name only 36,003 18. And in real dollars after inflation, diminish the value of their debt, right? They paid back 16,003 93 and after tax benefits, they paid back 12,006 55. Okay, so that means that they thought they were borrowing the money at seven Point three 7%. And after inflation, they were really only paying an effective interest rate of 1.06%. And after tax benefits, they got paid 1.16% to borrow the money. And they also live there for three decades for free.

Jason Hartman 28:19
Minus maintenance and gardener and home improvements. Okay, so they got paid to borrow the money. So we all know that example. But you know, you’re gonna say, Well, during the 70s, the late 70s, because Jimmy Carter was a disaster as president and probably not well, but he sucked as a leader is about as overrated as Oprah. So, so there was a lot of inflation during the late 70s, right in the early 80s. Till, you know, it got under control a little bit. So, what if the inflation rate is lower? Well, let’s look at 1989 to 2018. The inflation rate was only 2.6%. So what did that Due to the payment, well, on a typical house that you might buy through our network, your mortgage payments might be around $10,400 per year. That’s that top blue line, okay? But adjusted for inflation, those payments more reduced to $5,143 per year in real dollars. See, you write the checks for nominal dollars nominal, it just means a name only. That’s what the word means in name only. The name of it right is the same, but the value of it is different than the name, the value keeps changing. That’s a moving target. So that’s what happens when the inflation rate is only 2.6%. Remember the other example inflation rate was 5.1%. So it’s just about half. So a lot lower, but it still makes you pretty rich. Okay, so take a look at this one. So this shows you the rent the projected wind versus the mortgage payment. Okay. So at the beginning now, this is a property that isn’t that good. It’s not terrible, I might still buy it. But it’s not that great either. It’s got a point seven, rent to value ratio. And what I mean by that, of course, is that, you know, instead of renting from the ideal point, or 1%, rent to value ratio, meaning if the house is $100,000, it would rent for $1,000 per month, it rents for only $700 per month. Now, if you bought a property anywhere on the west coast of the United States, you know, you can only get point three 2.5%. Okay, so this is not that good property, right? It doesn’t perform that well. And that’s why I use it as an example because even if it isn’t that great, it still does okay. In the first What’s at four or five years, right? You’ve got a mortgage $10,400, and you’ve got negative cash flow. But as your rents increase at only 3% per year, and you all know, I tell you that the ideal is trying to get 4% per year rent increases, but you can’t always do it. Why not? Because it depends on the overall marketplace depends on how much rental competition there is in the marketplace. It depends on the overall inflation rate. It depends on how low the interest rates are. Because when interest rates are low, you can’t jack up the rents very much. when interest rates are high, you can really push up the rents because tenants don’t have an option of buying, okay? They’re going to be forced to stay in the renter pool, right? So over the course of that 30 years, look what happens, your mortgage stays consistent, assuming you don’t refinance it, which you may well do, but it’s consistent. So that’s that middle line. Where the green looks different, right? It’s just straight across. And then the rent is $21,844 per year at the end of that 30 year period, but you’ve locked in that cost of borrowing the cost of that debt. So, and then the cost of debt is, of course, being diminished by inflation as you as you saw, right? So So you think, in 2018, in this example, at the end of the chart, right, where the two greens intersect, right, straight across, you think you’re paying $10,400 per year in your mortgage, but you’re really only paying $5,143 because inflation diminishes the value of the debt. So look at the Delta, what’s the Delta, right? It’s 5900. real dollars, versus 21,008 44 in rental income. And this isn’t all the characteristics that’s Just a couple of them. So income property is the greatest thing ever. And here’s what happens with the house price. Okay, hang on a second, the house price in 1989 is the median price according to the Fred website hundred and 20,000 and change, you put $24,000 down, and now you’re controlling an asset at the end of that 30 years of $321,000. Okay, because the value of leverage. Now, on that last example, we didn’t adjust the rent for inflation. So what if you adjust the rent for inflation, right? But you sort of can’t. And here’s why. Because you didn’t get that rent in the beginning. You only got it over time as the rent went up. But if you wanted to, I guess you could easily do the same thing to the rent that you did the mortgage payment. So the mortgage payment is in dollars 5143. So it’s about half right? That about the number about half almost exactly. So now just take the rent and cut it in half. Okay, so it’s, you know, $11,000 give or take, right? But that doesn’t include tax benefits. And this chart appreciation does include a whole bunch of things does include the positive cash flow you got throughout the years, or anything like that. So that is why income property is the most historically proven asset class in the entire world that among many other things.

Jason Hartman 34:37
Thank you so much for listening. Please be sure to subscribe so that you don’t miss any episodes. Be sure to check out the show’s specific website and our general website heart and Mediacom for appropriate disclaimers and Terms of Service. Remember that guest opinions are their own. And if you require specific legal or tax advice or advice and any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to iTunes or Stitcher Radio or whatever platform you’re using and write a review for the show we would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.

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