Asset Matrix – Inflation versus Deflation

Jason Hartman starts the show by looking at single-family home sales and inventory. There’s been a low inventory in housing and one way to get more access is through the network. Jason shares a clip from a Creating Wealth Seminar explaining why single-family income properties are the most logical investment in an inflationary period. He discusses why the US is entering such a period under the Trump administration.

Jason Hartman 0:00
Welcome to this week’s edition of flashback Friday, your opportunity to get some good review by listening to episodes from the past that Jason has hand picked to help you today in the present, and propel you into the future. Enjoy. 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 transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it on now. Here’s your host Jason Hartman with the complete solution for real estate investors welcome listeners from around the world to episode number 797. Pleasure to be here with you today. Thank you so much for joining me. And thank you for reviewing rating and of course subscribing to the show. Really appreciate you listening and we also very much appreciate your feedback. And of course your reviews on the show on iTunes or whatever podcast platform you use. So thank you so much as we approach episode number 800. And then Episode Number 1000 will be here before we know it, won’t it? We have got an inventory shortage in the real estate world don’t we? Yes, we do. So in the news was out with an article just a couple of days ago, and it said January existing home sales show the fastest, seasonally adjusted annual sales growth. In almost 10 years, yes and IRS chief economist Lawrence Yoon, we had him on the show before. And you know, you got to take all the NAR National Association of Realtors stuff with a grain of salt. Of course you do. Because what does this largest trade lobbying organization in the world do? Well, they get paid to promote the idea of buying real estate and homeownership and all of this stuff. Some of the good, some of it bad. I would say that homeownership for oneself is not necessarily good, contrary to popular belief. And by the way, I’m glad to see that that belief is becoming a lot less popular. In fact, some of our colleagues in the industry that do similar things to what we do, and they do very well. They have a lot of investments, they’ve done very well for themselves. Interestingly, they like your humble host today. Are renters? Yes. I’ve been a renter for about five years now. No, actually six years, I used to always own my houses. And I just kind of don’t see the point. I like the flexibility. Now, I certainly believe in owning a lot of investment property, the most historically proven asset class in the entire world, only one one’s own home. Yeah, not so much. I don’t

Jason Hartman 3:27
see what the big deal is. It’s such a bargain to be a renter of an upscale property and in such a bargain to be an owner of a lot of bread and butter, basic properties that you can rent to other people. And again, so many people ask me this question. That’s why I just mentioned it for a quick moment here. What is the cutoff point? Right? Well, the cutoff point happens to be, I believe, just below the current national median home price, and what is the National median home price is $228,900 in the good old us of a single family homes a little higher than the median, because their median price is 230,400 and condos and co ops 217,400. And again, when you’re an investor, really, really, you know, I’ll make an exception to this once in a while if the deals good enough, but get yourself a single family home. Don’t be investing in condos and townhomes. They just ain’t is good for many reasons. They’ve got complexities to them. When you get a big, overbearing homeowners association and a bunch of people sharing the walls and things get complicated. Yes, collectivism does not work very well. This is one of the areas that doesn’t work. It didn’t work in the former Soviet Union very well either in it. It doesn’t work in Cuba, and it doesn’t work anywhere. It’s tried. It’s always a disaster, collectivism, communism, whatever. So, yeah, get yourself a single family home. That is really the most historically proven asset class in the entire world. But yes, sales are up, inventory is down. According to NAR home sales increased 3.3% to a seasonally adjusted annual rate of 5.69 million homes. January’s number show a resilience of homebuyers. In other words, businesses is booming. One of our clients who was just on the show recently and that was Matthias What a great contributor. And by the way, you haven’t even heard all of Matthias contributions. We have thousands of clients out there and we love it. When you guys you know, jump on the show with us contribute, share your experience, and you have a lot of great ideas and you do a lot analysis. So we really learn from you, we’ve been doing this so long, and it’s just been such a wealth of information has really come from our clients. Now, certainly a lot of it from my own reading from the company’s research and, and that’s what we do and hey, that’s what you pay us to do. That’s how we earn our money, doing research, sharing experiences, collecting and aggregating experiences of our clients and sharing them back with you. And that’s a big part of our job here. Yeah, Messiah just sent me a voxer this morning, saying that he had lost out on a couple of properties he was hoping to buy. I’m really sorry about that, that is a symptom of the market. And it’s a symptom of these local market Specialists of ours being just inundated with business and, you know, we we definitely hold sway with him more than any other source. So you know, they’re all in their local markets and they’ve got some buyers Coming to them directly, and so on and so forth, as you would expect, but for most of our providers, we are their biggest source of business, they really go out of their way to please our clients, and to take care of business with our people first, and you will certainly see the benefit of that. But again, some properties do slip through the cracks. And I just kind of try to

Jason Hartman 7:25
surrender to some things in life. I’m not much of a surrender person. I’m not very Zen like I wouldn’t say but I certainly value that concept. And I try to, I try to let that balance me and, and you’ve got to do the same thing in your own thinking in your own mind. And, and sometimes, you know, one door closes and another door opens. And when you look back on it, you just find out that hey, it was really good that that happened. That thing that seemed like a misfortune at the time, really turned out to be great news. So anyway, that’s that’s how it goes. Yeah, listed. are in short supply inventory is in short supply. Get with your investment counselor at our company, let them help you let them work with you individually, of course, go to the Jason hartman.com website, click on the Properties page. But again, and you know, this is true in a lot of areas of life. Sometimes the best properties just aren’t on the market yet. And you’ve got to work with the investment counselor, and really, really, you know, get those properties. The second they come up. Okay, that is the market we’re in. And it’s probably going to be the market. We’re in for a while as we work away under the new Trump administration that is going to be, in my opinion, just a boon for the economy. I mean, things are just the growth is going to be fantastic. I know Trump is making a lot of missteps. I agree. I mean, he’s he’s pissing a lot of people off, but hey, some of it. I actually Like, and I totally agree with him on some I don’t like too much, but it is what it is. But for the real estate market and for business, our first real estate president, our wealthiest president ever, really one of the few business people presidents we’ve ever had. And now we have had a few throughout history, but not

Jason Hartman 9:18
many, not many. And so I’m I’m really, really optimistic now, with optimism, and with economic recovery and progress and advancement comes what the natural thing that comes with that is in fallacious and what comes with inflation, higher interest rates, yes, Goldman Sachs is out with a report talking about how interest rates will rise to 5.5%. Now talking about mortgage interest rates will rise to 5.5% by 2019. That’s not far away. You know? What a good year in three quarters. Right? And remember, when I talk about those in mortgage interest rates, we’re talking about owner occupied homes. Okay, that currently sit around 4.15%. So that is a very, very, very significant increase in rates. Okay? Remember, don’t be the fool who thinks that when the rate goes from 4% to 5%, it’s a 1% increase? No, it’s not a 1% increase. It is the delta between those two. So here, Goldman Sachs is talking about rates going up. What would that be? You know, I’m not looking at my calculator right now. But that would be more than 25% that increase in rates right. What am I right on that? Yeah. You know, when you when you take 4.15 and compare it to 5.5% That is hugely, hugely significant. Okay? And remember, for if you’re if you’re one of these really, really foolish people, okay? And look at no person is always foolish at all or always smart, right? We just have moments of foolishness we all do. You know, it’s like that great lyric and one of the Android rubber Weber songs, he says, I think it says, Love makes fools of all of us, right? Love makes fools of all of us. And so, we get foolish look at we’re all human, we all go with a mob mentality. And that can really hurt us sometimes. Sometimes, you know, the momentum of the market and, and the vibe of people. It’s a good thing. You know, it just depends. That’s why we have to use our intelligence and we have to really think things through and and use our power of reason and iron Rand’s philosophy of objectives. Yes, we had urine Dr. Urine Brook on the show recently, one of the one of the people who heads up the iron Rand Institute in Irvine, California, where I took some objectivism classes years ago. Good, good stuff who is john Galt? Yeah, I mean, hugely significant increase in interest rates potentially coming. So if you’re being silly and you’re being foolish, and you think you’re going to time the market, and you’re waiting for the big Harry dent crash, where he doesn’t identify the difference between linear markets, cyclical markets and hybrid markets it just foolishness, Harry, think think think,

Jason Hartman 12:42
come on. You can’t call all real estate the same. It’s not the same. Just in the US alone. 400 real estate markets for hundred real estate markets. How can you talk about real estate as if it’s one thing How can you talk about the entire planets real estate as though it’s one thing that’s absolutely psychotic, it makes no sense whatsoever. But that’s why you need to listen to a real estate specialist, not a generalist, because generalists don’t make distinctions. They talk in sound bites, and they’re talking about so many different subjects, that it just doesn’t it doesn’t work, right. It doesn’t work. Well, hey, look at without much further ado, here. We gotta get to our guests segment today. And our guest is Jason Hartman. Yeah, he’s going to be talking sharing a live talk that I did several months ago at our event in Phoenix. And I think you’ll really enjoy this. I talked about it many years ago at meet the masters of income property, one of them that we had in Orange County, California years ago. And it is the asset matrix, where we talk about and I compare how different assets perform in inflationary environments and deflationary environments and stagnation environments. Okay, so the three basic economic maladies, inflation, deflation, stagnation, deflation literally being the scariest and the worst and something that central banks and governments just cannot let happen. So they will print money into oblivion to stop deflation. And I believe they will succeed because there is no limit to the amount of money they can ever print. So if you think they’re gonna let deflation happen, I wouldn’t bet on that, you know, never bet against the Fed. never bet against the government. never bet against the most powerful forces, the human races ever known governments and central banks. Okay, do not do that. Always bet with them. If you’re betting against them, what are you doing? You’re buying gold? Okay, you’re crazy. Gold has been a terrible Performing asset over the course of, you know, the last several decades since we went off the gold standard in 1971. Now it’s had its moments of greatness, no question about that. But overall, crappy terrible tax treatment. No cash flow. No financing available gold. Yeah. Amateur investment? For sure. Insurance. Yeah.

Jason Hartman 15:20
Okay have a little bit if you want, but it’s not an investment. Income property, you’re betting with the Fed, you’re betting with the government, you’re betting with every central bank in the world, you’re betting with every government in the world, you’re betting with your hitching your wagon, you’re hitching your star to the most powerful forces the human race has ever known. And that is very, very good. So let’s get to this talk. But of course, and by the way, I am so happy that we have several new guests, coming to our upcoming venture Alliance weekend here in Las Vegas. Nevada, that is going to be March 10 through the 12th. We’re going to be at the gorgeous Wynn and encore Hotel in Las Vegas. And we’re just going to have an awesome weekend. We’ve got the former governor of Nevada coming to speak with us. We’ve got a couple of other speakers we’re talking to having lined up yet. You’ve heard them on the show. One of them is quite famous, by the way, and we’re going to do some funny stuff too. We always make sure we combine fun in there with our networking and our thinking and our masterminding. And it’s just gonna be a fantastic event. Some of our local market specialists are coming this time. So if you want to really get close to some of our local market specialists in the different markets, they will be there. You can talk with them, you can get in good with them so you get the first pick of the best properties. You can come one time as a guest for just a $2,000 one time fee if you decide to become a member, we apply your guest fee to your membership so long As you join, you know, within a week or so, after coming, you can’t think about it for six months and then say, Yeah, I want to join, then you got to pay full price. But yeah, it’s it’s a great thing. So come and join us in Las Vegas, you can check that out at venture Alliance mastermind calm or on Jason Hartman calm in the events section. And then also, of course, we’ve got our Memphis property tour that by the way, certainly that has not sold out yet. But you know, those tickets have been selling like hotcakes. That event, I’m pretty sure is going to sell out our big Memphis property tour at the beginning of April. So check that out at Jason Hartman comm as well in the events section, and we will look forward to seeing you at these next two events. And by the way, venture Alliance members get our property tours, our meet the Masters event are creating wealth seminars, our GHQ live events, they get those all for free. And that’s really great. Remember, You’re listening to flashback Friday. Our new episodes are published every Monday and Wednesday. Join us for those two events. We’d love to see you there. And let’s get to this live clip where I talk about the asset matrix and how different assets perform in the three basic economic scenarios. Here we go.

Jason Hartman 18:26
One of the things I talked about at a meet the Masters event several years ago is I talked about the asset matrix strength of various investments in different economic scenarios. And so here we’re just covering inflation, deflation and taxes, not stagnation. But as you can imagine, of course, stagnation is somewhere in the middle, right. So this is an interesting matrix, because when you talk to the inflation people, and we know that income property as the most historically proven asset class in the world is fantasy. pastic in a deflation in an inflationary scenario, it’s a home run, right? But you’ll talk to other people who are, you know, big Federal Reserve conspiracy type people and so forth. And they’ll say, Well, you’ve got to own gold. The gold bugs will definitely say own gold, own precious metals. But I say gold because it’s a one dimensional asset class is very, very inefficient. And it has no tax benefits. Of course, it has no cash flow, and so on and so forth. All the stuff you hear me talk about on the podcast, but your mortgage is an asset. Most people consider it just a liability, right, but your mortgage is a fantastic asset, because you can take advantage of what we all talk about inflation induced debt destruction, inflation induced debt destruction, and that means that the mortgage will vastly outperform gold, okay, in the inflationary scenario, but really what you want in any inflationary scenario, of course is commodities in general. commodities are fantastic. So when you look at an income property, our properties are, of course made of all those ingredients. They’re made of concrete. They’re made of lumber. They’re made of glass, steel, copper wire, petroleum products, all of these great commodities that are traded around the world, and they’re not attached to any one currency. They have universal need. Everybody on earth needs these commodities, because they are in the the ingredients of any structure, any house or any, any kind of building. So when you look at gold, it’s helpful to just tell a little story that happened to me many years ago. This was back when the gold price was just over $400. And I got a call from this company, a gold dealer in Newport Beach, who advertises on the radio extensively, and this is when I lived in Orange County, California. And the guy calls me up and he says, Mr. Hartman, you know, you’ve got to invest in gold because the Federal Reserve and Iraq and Iran and all this uncertainty in The world you know, the the gold bugs love gold because of the doomsday scenario or the inflation scenario, either one, they love it for that reason. So he goes on to say, all of these reasons you’ve got to have gold in your portfolio. And I said, Okay, okay, stop, stop, stop. you’ve sold me. I will buy a dozen coins from you. A dozen one ounce you know, American Eagle gold coins, and I will send you the money. I’ll just send you a cashier’s check on Monday. You send me the gold. Great. So you’ve sold me Stop pitching me. Now. I go on to explain to him and this is admittedly just to do the Jerry Seinfeld thing and kind of razz him a little bit. You know what he does to telemarketers, right? And I said, so I’m an income property investor. I love investing in income property. And one of the reasons I love income property is because I can acquire that asset and I can rent it to somebody else and that produces income for me. Do you know anyone who will rent my gold coins? And of course, he says, No, people don’t do that with gold coins. And they said, Okay, fine, fine. I’ll give up the income. But the other thing I love about income property, and the reason I think it’s the most historically proven asset class in the world, is that income property can be financed for three decades with incredibly low, historically low fixed rate mortgages. And it’s debatable, like we were talking about at dinner last night, that that fixed rate mortgage is actually a negative interest rate. In other words, I’m literally borrowing money below the rate of real inflation, not official inflation, because we know the government manipulates those numbers and understates them. How do they understate them while they understate them with three major techniques waiting, substitution, and what hedonic makes the hedonic in index, which means the amount of pleasure you get from an item versus what you paid for the item, right? So the way weighting works is they just give more weight to one thing and less weight to another thing, right? And that will change the inflation index. And the way substitution works is they say, Well, if the price of beef goes up, they just think, Well, everybody will just switch to chicken. But maybe you don’t like chicken you think chickens a dirty bird, right? Which I, by the way, think. So that’s the reason that it’s manipulated just in those two ways. But with hedonic, it even gets more complicated and conceptually, the idea of hedonic adjustments. Remember the root word here is hedonism. Pleasure seeking, right? Is that they, they they have a logical basis, but in practice, what it means is that we as people, you, all of us are not entitled to progress. We’re not entitled to progress. So here’s an example. This computer when I bought It’s about two years old now cost about 20 $800. And now, I can get a brand new computer that is dramatically better than that one from almost two years ago. And the interesting thing is, if you, you know, buy Apple products, you know that they’re pretty much always the same price. You know, every new iPhone is pretty much the same price as the old one. It’s just better, right? And that’s the same thing that happens. So I’ll pay when I buy a new one, I’ll still pay about 20 $800. I always seem to pay about 20 $800 for a new Mac, right? But they keep getting better and better. So what the hedonic index will do is it will adjust the price and say if the new computer is twice as good as the old one, because what that’s Moore’s Law, right? The speed of the processor every 18 months, doubles and that’s why we get this massive obsolescence and that’s why if you fall At all my show the longevity and biohacking show. And you might also follow if you follow that show Ray Kurzweil right. He talks about singularity, this whole idea that humans will basically merge with computers by 2030. And one of his metrics for that is that a, the processing power of a computer would be equivalent to the human brain for $1,000. In today’s dollars, for $1,000, you could buy another human brain, pretty awesome deal, right? We’re not there yet, or they’re not there yet. But imagine what the hedonic adjustments will be then because literally our brains are the most incredible miracle in the universe so far that we know of right. So in the hedonic adjustment not to get off on another tangent in the hedonic adjustment. If this if the new computer is twice as good as the old one, and I still pay 20 $800 the index will assume I only paid 1400 dollars. That’s the hedonic adjustment. But I really didn’t pay 1400, I really did pay 2800. But what I got was twice as good. So you see how that works, the hedonic adjustments. So the mortgage because of inflation induced debt destruction, is the most powerful tool by which to take advantage of the home run of inflation. And I totally get that inflation is relatively now low now. And it has been for a couple of years unless you talk about the cost of health care, college tuition and real estate. What’s interesting is that nobody considers inflation to be the they consider to be the what’s called the rental equivalent in the price of a home that you’d have to live in, right, because we all need to live somewhere, but they don’t consider the price of becoming an investor. Interestingly, so and I don’t know of anyone that talks about this, but I think it’s a little legitimately part of the concept of inflation, because if the s&p and the Dow Jones and the price of investment property is higher, then it costs more money to enter the investor class. And we all know that the only way you really get ahead is being part of the investor class, right? Otherwise, you get creamed. If you have a regular w two day job, you are taxed at the highest rate of anybody. And if you rent, and if you don’t own income property, you basically have no real tax deductions. I mean, you can donate money to charity, but you still, unlike the beauty of depreciation, you still have to write a check for that, right? If you have your own business, or you’re an independent contractor, you can spend more money on your business and get a tax deduction for that. But you don’t get to take advantage of the non cash write off for the Phantom write off. So commodities are the typical hedge for the gold bug inflation, mindset people, right? So we here’s the what I call the ultimate investing equation. Basically what we do is we acquire a package of commodities because I call it packaged commodities investing, right? When you buy a single family home or an apartment complex, you’re buying all of these commodities that are traded globally, the copper wire, the glass, the steel, the lumber, the the labor that goes into it, the energy that goes into all of these commodities that have universal need and are traded globally not indexed any one currency, that’s important, because they have intrinsic value outside of any given currency. All right. So you acquire the commodities, that’s the house and the land is also a commodity. And then you go to the bank and you say, look, I want to buy these commodities, but I only want to put in a small portion of the money to acquire them. So the bank says, Okay, well, if you’re an investor And you’re going to rent these commodities. They don’t refer to it this way, of course, to somebody else, then we want 20% down. So the bank now gives you 80% of the money. And your leverage ratio is now four to one. Okay, so you’re already four times bigger than you otherwise would be, because the beauty of leverage, right, so so far, that’s the first part, the first two steps of the ultimate investing equation. You buy the package commodities already assembled for you, by the way, in the form of a house or an apartment building. You use, you use 80% of somebody else’s money to acquire them. And then you say, Well, look,

Jason Hartman 29:43
you know, this Jason Hartman guy tells me that debt is great when it’s used properly, but I don’t want to pay my own debts that would be really burdensome to pay my own debts. So I’m going to outsource the debt obligation to somebody else, and I’m going to call them a tenant. Okay. And in addition to telling that tenant to pay my debt for me, I’m going to tell them to pay me a little extra every month. And that’s called positive cash flow. Right? So now think of what we’ve done in the ultimate investing equation, we acquired a package a commodity is not indexed to anyone currency that is intrinsic, universal need. Every human on Earth needs these commodities, and they have certain scarcity limitations to them, right? And then we use 80% of somebody else’s money. And we get that money at three decade long fixed rate loans. So if we borrow this money today, in 2016, we won’t make the last payment or really our tenants won’t make the last payment on that mortgage. Until 2046. That is absolutely a spectacular idea. Okay, because in 2000 byte, by the time we go through the next three decades, do you think things will change? Do you think with all the debt The country has, and the unfunded entitlements? The what’s called the when I have Laurence Kotlikoff, the economist on the show twice, he talked about it and called it the 220 trillion dollar time bomb, trillion with a T, okay, the 220 trillion dollar time bomb. And with that, I mean, there is no possible way we can pay for this stuff. It’s impossible to pay for it by taxing the rich as all the liberals would say, you know, let’s just tax the rich, the rich don’t have that much money. We can’t possibly tax tax the rich enough to pay for the problem. And if we did, that would simply make the economy smaller anyway, right. So that’s impossible. Okay. So where are we in the ultimate investing equation? We bought the commodities we borrowed 80% of the money, we outsource the debt obligation to somebody else. But wait, there’s more. As they say on that late night infomercial, right? You get an extra Ginsu knife included, right? Well, it gets better, because then we say, look, the largest expense in any of our lives are taxes. And if we can eliminate or dramatically reduced the largest expense any of us have in our lives, we can build wealth so much more quickly. And so we go to the government and we say, hey, look, I’m doing exactly what you’re incentivizing me to do. I’m providing rental housing to people. And the real estate world has this giant lobby and this huge amount of special interest. And so they give it very favorable treatment, making it the most tax favored asset class in America. So we want to save money on life’s single largest expense. The government says, Okay, we’ll let you depreciate the value of your improvement on the property over 27.5 years. And we went over that yesterday. In Depth, we talked about real estate professional, we talked about qualifying for that, and how it does phase out, and so on and so forth and how you might be able to get it back if you can qualify as a real estate professional. But let’s say we can’t take advantage of depreciation immediately. And over time the asset appreciates in value like the refi to die scenario I talked about earlier, or Michelle’s great video talked about really, then we can 1031 exchange that asset and sell it tax deferred. So we get to reinvest all of the money over again

Jason Hartman 33:36
into a new asset. And as the cashflow dynamics change as properties appreciate what happens, the rent to value ratios get out of whack, right? That the rents lag appreciation always. It’s always rents that come up the slowest. And appreciation happens more quickly in the cycles where you have appreciation. So that’s the ultimate investing question. It’s pretty beautiful. And that’s why we’re all interested in this asset class. But just to finish the gold story, so as I’m heckling the telemarketer guy that’s selling me the gold, just to finish the gold story, I tell him, Look, I want to rent out the gold. He says, nobody does that. I tell them, I want to finance the gold for three decades in historically low fixed rate interest rates that are arguably below the cost of inflation. And since every gold bug is an inflation bug, he has to believe this right? Because he thinks the hedonic adjustments and the waiting and the substitution adjustments that they make to do the consumer price index are BS. Of course he does. He’s a gold bug, right. And then I say to more look, another great thing I love about my income properties is they’re very tax favored, right? So you know, certainly can i depreciate my gold coins? Hmm, what’s that? No, you can’t do that. Well, what about when I sell them? Can I sell them and exchange them for silver coins without paying the game And he tells me no gold actually has far inferior tax treatment, because it’s a collectible. And collectibles pay an even higher tax rate. Okay, so it gets even worse, right? So this is not the answer. Look, remember, part of my teaching? Is that anything that and this is worth writing down if you haven’t been to my creating wealth program, right? Anything that does not produce income is not an investment. Anything that does not produce income is not an investment. It’s just a speculation. It’s got to produce income. That’s why instead of calling it real estate, I try to catch myself and call it income property, because there’s a difference. Okay, so the mortgage gets devalued over time with inflation and do step destruction and we’ve talked about that a lot. So I won’t cover here. The value of the real estate because it’s a commodity is hedge to inflation. But if you look historically, real estate doesn’t really Go up that much in compared to inflation, it sort of tracks it pretty, pretty close. You know, it’s it’s not that great. If you didn’t have the leverage the leverage is what makes it phenomenal. But even if you didn’t have any leverage and you paid cash for it, it’s still much better than really any other asset because it produces the income and the potential tax benefits and certainly not potential. The potential tax benefits are just on depreciation. There are real tax benefits when it comes to 1031. Exchange. Okay, so that’s phenomenal. The best things in the inflationary environment, the strength of the investment versus inflation, gold, but very limited one dimensional asset class, the mortgage and the value of real estate. When you split those two components up, very powerful. The income from your job, medium strength, hopefully you’ll get cost of living adjustments from your job income, hopefully your rental income will increase at about the rate of inflation. That’s probably pretty likely, okay. And then your stocks will hopefully keep pace with inflation. Hopefully you don’t even own stocks after we’ve talked about this because Wall Street is the modern version of organized crime. Okay, so then what has really low strength against inflation? Well, certainly cash, cash gets destroyed by inflation, it gets devalued. Because if you take out and you know, take, take some money out of your wallet, right? And let’s see what we have in here. I’m not much of a cash person. But here I’ve got what is this called? Can you see it from here? $5 It’s called $5. Today, what was it called? 100 years ago? Lots of money. That’s good. Yeah. No, no, it’s one penny now compared to years ago, right? Yeah. Yeah, you you you I know you understood that a lot. But the $5 was called $5 100 years ago. Just a reminder, you’re listening To flashback Friday, or new episodes are published every Monday and every Wednesday.

Jason Hartman 38:09
The name has not changed. That’s the difference between nominal dollars in name only. That’s the meaning of nominal versus real dollars, which is the value of the dollars today, right? So cash gets destroyed by inflation, and that’s why they call inflation a pickpocket. Because literally the money in your bank account in your wallet, okay, is constantly being attacked, you’re being pickpocketed because the value of it is being debased by inflation. So it’s terrible. bonds, terrible in inflation, pension income, awful in inflation because there’s no adjustments to it. Bonds are just alone. Okay, let’s go back to bonds for a second. Bonds are alone. So remember, to take in flus to take advantage of an inflationary environment, even if it’s moderate and low, if it’s two or 3%. Or if it’s 10% or 13%, or if it’s hyperinflation, and it’s 50, or 100%, which we’ve never seen in the US. We have seen significant inflation from the wonderful policies former President Jimmy Carter, that’s sarcasm, by the way, just so you know. Probably a very good man but a terrible president. Okay? So bonds are just alone, you’re on the other side of the loan, you’re the lender. So the value of bonds gets massively debased by inflation. Taxes are interesting. The IRS does not account for inflation. And this can work for you or against you. And it can be beautiful or it can be terrible. people that do not have tax advantaged event investments like we do, they are getting destroyed on taxes. But the IRS in the tax code you can just see it through and through. And you know, we could go off on a really long tangent talking about this one. It does not account for inflation and it’s really good for us as investors but bad for most people. Okay, so let’s look at it versus deflation in a deflationary environment and I’ll make this one a little quicker. Cash actually goes up in value in a deflationary environment, so to bonds, so does pension income. So if your pension income says that, okay, you have this pension and it will pay you $5,000 a month. Well, if you have deflation, that $5,000 is going to become more valuable. So the value of that pension income performed very well and had a lot of strength against deflation. It was wonderful, right? And taxes pretty good because the IRS doesn’t account for inflation. Okay. So job income kind of medium because it will usually deflate in a deflationary environment. You’ll have actual pay cuts. That’s no fun. rental income. We’ll probably stay about the same or even deflate a little bit in a deflationary environment in less you consider and this is what we don’t necessarily know what I was talking about this morning when I talked about the three dimensions of real estate, right. So that rental income adjusts, first of all very slowly because most rents are set up on one year leases, right? That’s the first thing to understand. But the second thing to understand is that when the value of the properties deflates, and as long as the population is stable or increasing, people never have incentives to move from the renter pool to the homeowner pool. And therefore rents can actually strengthen in that deflationary environment. And I’ve certainly seen that happen before in my lifetime and my time in the business. I saw it happen not too long ago actually. Okay. So gold terrible. The mortgage is terrible because the value of the debt in increases, right? The burden actually becomes higher because you have to pay it back in more valuable dollars, versus what we talked a lot about is inflation and debt destruction, you pay the debt back in less valuable dollars later. The idea being in 2046, the dollar today will still be called $1. But it’ll be a lot less valuable. So you pay it back and cheaper dollars over time. And that’s a beautiful thing. But in a deflationary environment, that debt becomes more of a burden. It’s worse for you, right? And so this can theoretically crush you. But wait, there’s more.

Jason Hartman 42:40
Because what really happens in real life is this in real life, the implicit what I’ll call nuclear option. The backdoor option is that people just default, they strategically default. We saw millions and millions of millions of people do that on the last cycle. We saw doing On the cycle before, and guess what? It’s unfair. We all agree it’s philosophically wrong. But it is the way it is. It is reality. The people with the highest loan balances, got all the bailouts. They got all the loan modifications. They walked away. They lived in their house in Florida for sometimes three and a half years and didn’t make a payment. They live there for free. And then the lender came along and said, some in some cases by countrywide be evaded, we will pay you we will literally pay you to do what’s called a cooperative short sale. You don’t have to supply any documents, just put your house on the market and sell it and we’ll pay you between 3000 and get this $32,000. Okay, to help us sell the house, because if we take it back, it’s going to cost more and remember That’s just what the contract says. The contract the deal is when someone gets a mortgage is exactly this. Either the borrower will pay the mortgage, or give them the collateral. That’s the deal. That’s what the contract says. So you have those two options. One option is pay the mortgage. And if you decide you don’t want to pay the mortgage, or you can’t pay the mortgage, then give them the property back. That’s what the contract says. Okay? And that’s the way it’s worked for a long, long time. So the mortgage gets more burdensome with the exception, the little asterisk is the nuclear option. All right, the value of real estate becomes lower because in a deflationary environment, those commodities become less expensive, right? I don’t want to say less valuable. You notice I was about to say less valuable, and I caught myself when I said less expensive in in real dollars. Okay. So There you have it, the mortgage really moves up into the medium category, I think, maybe even the high category. So that’s kind of the investment matrix. Now what about taxes? Okay, so with taxes, it’s a funny thing. And I don’t have a lot of time to go into the tech stuff, unfortunately, because we’ve got to talk about manage property managers versus self management, and do a whole bunch of other things today and, and have Michelle finish out the property tracker segment as well. But the mortgage highly valuable, because it’s tax deductible, right? It’s beautiful thing, but it’s not nearly as good as depreciation or 1031 exchanges. And there is actually another tax benefit that I pretty much never even mentioned, because it’s pretty small, but it’s a little perk and it’s not bad with your real estate that you own in different parts of the country. Remember, you can travel to visit your properties and take deductions on those expenses. Now, remember, we have this one speaker come in I really just railed on him after he spoke. Because he was basically saying, well buy properties in places you like to visit because then you can go there and deduct your trip. And I said, Are you joking? You’re telling my audience to to buy a property and make $100,000 property decision to deduct a $400 airline ticket. Talk about the you know, the what’s the cart driving the horse? Sarah, what’s the right? Say? Yeah. We’ll get that thing backwards. Right. Don’t shoot yourself in the two. All right. So it’s just a little perk. It’s a little side work. It’s not a big deal. Okay, cash medium in the taxation world. rental income medium, of course, you have to declare it obviously, your job income, terrible performance against taxes, get slaughtered against taxes. All of you need to have your own business. I know the vast machine of this room, you know, we got a lot of Silicon Valley people, all of you pretty much in this room have corporate type jobs, few of you have your own businesses, right. But the corporate type job is just the worst deal ever tax wise. You’ve got to have some little small business on the side, do anything. You know that person that’s bugging you to join their network marketing program. Just join it so you can have something to have tax deductions with. Right? Okay. Don’t buy too much soap though or anything like that. All right. Or wine. Just buy enough to consume right? Okay, so bonds terrible in the inflationary environment.

Jason Hartman 47:39
No benefit there at all. Gold, or sorry, we’re talking about taxes versus taxes. Gold is awful. Stocks are absolutely awful. You sell one stock, you got to pay the tax before you buy another. When I sold my last company. I went to so many advisors, you know really high level advisors. I said Is there anything I can do look, I will buy Another business. Okay, I will not call this my retirement and, you know, I will just buy another business in real estate. Can I do a 1031 exchange? I’ll reinvest all the money into another business. Nope. pay taxes. That’s it. That’s it. Nothing. The income property the most tax favored asset in America. So that’s that. Okay. So I just wanted to present that to you. Thank you. 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 Hartman 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 are 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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