The Impact of Inflation on Real Estate

hey guys it's Kim McElroy here thank you guys so much for all the great questions - ken macro calm and - YouTube and all the things you've been liking and commenting on I appreciate it I'm getting some great content and obviously hoping to deliver whatever it is you're looking for and kind of the big topic this week is around inflation and obviously that's having a lot to do with the government stimulus money coming and the PPP money and the e IDL money and the unemployment money and the stimulus money it's all flooding in to the economy to individuals to businesses etc and of course we don't really know the extent of that how much it more is needed and how long this is going to go but the point is it's trillions of dollars right now we all know that and of course it's flooding our money supply or it's about ready to so there's a bit a little lag there and we'll we'll talk a little bit about that but right now I want to talk to you guys about how inflation actually helps real estate and so there's one of the questions that you guys should be considering right now that you're sitting on savings perhaps or you're sitting on something that you're invested in or maybe it's just a direction that you want to go you know how can we all make money during during you know this next recovery phase you know because the government is printing that those are the facts and so you know we're just trying to get ahead of the facts and do the right thing so that you guys can be on the the winning side of this and not on the on the losing side and so what we're going to start with is a real basic thing about you know what inflation is and there's a you can we can go into a lot more detail here but generally it's the rising in prices and it's the lowering in purchasing power so said another way if you guys take a look at let's say a cup of coffee that used to be a dollar it's now two dollars so you know what used to be one dollar is now two or $1 was $3 or $2 was $4 that's what the increases in prices are so if you had let's say let's say you found a dollar that's been in the back of your drawer for you know five years ago that dollar would now buy less and so that's what that means is that the purchasing power is going to go down and the rising prices will be part of the inflationary process here and I don't think that anybody's disputing on whether or not we are going to have inflation and I don't know how you can make the argument when we've just doubled the money supply and given all this money out in stimulus which was necessary but so I'm not debating that what I'm saying is now we're in a situation where there's a lot of money coming into the economy and you guys just to be able to do the right things so let's keep going here there are three main factors that create inflation and the first one is what we call a cost push the second one is a demand pull and the third one is printing money so the first one is a cost push so think about this wherever you're working or maybe you're at it maybe you have your own business or whatever it might be as things go up in price so in in our particular world my particular world you know we're a builder we build apartments and so as lumber goes up and drywall goes up and and concrete goes up those are costs that actually get put into the project that we're building and so therefore it costs more and therefore we have to charge more rent and so same thing on the home builders if the home builders costs are going up then you know they're trying to make certain margins so that gets passed on to the home buyer so this can happen in coffee you know if coffee beans are going up or shipping them to the United States goes up then they have to charge more for a cup of coffee so that's what cost-push is one of the things that i found on the internet that i found years ago that i loved was the there aren't very many companies that are over a hundred years old but one of the churches i saw years ago by by a friend of mine by the name of Mike Maloney who studies a lot of gold is the Campbell Soup chart and why I love the Campbell Soup chart is because we all know what Campbell's tomato soup is it's been around for years and years and years and years but what's fascinating is to just to take a look at the price of Campbell Soup over a long period of time and so I found that on the internet and so what we have here is we have Campbell Soup being around ten cents nine cents all the way up until about the 70s here and what's interesting here is that this in 1971 in August 15th of 1971 Richard Nixon actually let the dollar off the gold standard so in other words the gold and the dollar were tied together so in other words it was a stored value and they were that's what kept the economy stable that's what kept the dollar stable so in my era my parents used to say you know safe safe safe safe safe and they were right because they were in this area era and a dollar had a good stored stored wealth and so but in 1971 when the the dollar was lifted up the gold standard that's what that's what happened that's when we started to really see inflation and you can see it just in this can of soup you can go back and look at anything you can look at a movie ticket you can look at anything and see and track it you know movie tickets are a lot more than they were 10 years ago for example and so that's the point of this graph is to show you that was once 10 cents is now 86 cents same thing you go back and look at what your parents paid for their house or maybe the house that you grew up in or whatever it might be my parents paid like twelve thousand dollars for my house the house that my mom is actually still in it's now over $300,000 and in the Seattle area so it's the same thing it just doesn't really matter what it is but I love this chart and I'm gonna talk a little bit more about this because if you guys don't know what really happened in 1971 August 15th you should really study this because this is when we became a fiat currency and the government could really produce and print any money that they wanted as they kind of managed some of these Corrections and of course we are now the world's reserve currency by about 70% 70% of the world uses US Dollars and so the big issue that we're having now is that a lot of the countries don't want those dollars because of this and also because we now we're even printing more and so what would you would probably see is a can of soup is probably gonna jump again maybe do a dollar 22 or 30 who knows at this point but that's a great example of a cost push for for inflation so the demand pulls a little bit different so demand pull means that there's a lot of demand for something and this is typically temporary and the reason why I like the man pull is you have let's say let's say it's a Super Bowl ticket or you know some kind of coveted thing that you know demand there's so much demand for it that's jacking the prices up now that can also not just be a ticket for a game it can be anything that's scarce and so you see this a lot of times in old cars that there's only so many of or whatever it is but that's that's called demand pull inflation and so you know you know I own I own a bunch of old cars and so they have gone up in price because there were few of them and over the years they've actually gone up because the demand as long as the demand is still there now after you know what we just went through the demand probably won't be there and the those cars will probably go down in value more than likely so and then the last one is printing money and this is the one that I want to focus on today and basically what this means is as I explained to you all this money is going to employers and and individuals that need stimulus in order to pay rent and buy food and you know pay their car payment all those kinds of things so a lot of people don't file bankruptcy even though a lot of corporations are filing bankruptcy right now the point is is that there's lots of money flooding into the economy right now and so what happens and as I showed you on this chart here on the on the chart here is as the money starts to as more money starts to chase fewer goods then the prices go up and so as more money comes into the economy and they're and they're chasing too few goods then the prices are definitely going to go up and so those are the three main things for inflation and so what I want to show you next is why I think the difference between debt and savings and I know we talk a lot about this but now this is the traditional habit of most people they make their paycheck here then they stick it in the bank and then they put it into a savings rate and we all know that those savings or savings rates are really really really bad in fact in more than one case they're under 1% in a savings account and so but this is what a lot of people do is and I don't blame them it's usually because they don't understand how to invest that money and they feel comfortable having that money in savings and I'm telling you that inflation basically kills savers and if you want to look at a great quote just look at ronald reagan's quote on on savers he basically said inflation is as bad as a mugger it basically is a hidden way to steal your money and so it's going to kill savers for sure but here's really what I wanted to talk to you about when the money when this money your money gets the positive into the bank it's actually a liability to the bank in other words this 10,000 is an expense to the bank because they owe you an interest rate on it so let's just say it's 1% so $10,000 at 1% that's a that Bank has to pay you 1% in a savings rate but banks are in the business to loan money so they loan money to guys like me here and and so what we do is we take the same 10,000 that you've given the bank and I borrow it in in the form of debt or in the form of a loan and this is what I wanted to talk to you about and this is why if you're in fixed rate debt you're gonna do really really really well during this inflationary period now the one thing I wanted to point out there's good debt and there's bad debt okay and I've talked a little bit about this before bad debt is credit card debt it could be even debt on a car or a boat okay good debt is debt that's actually invested into something that's growing in value and you're actually getting a cash flow on that now we've talked a lot about this and there's a there's a lot on this on my videos at Ken macro calm and I'd hear it also on YouTube and so just be super careful when you're borrowing this money that is good debt and not just bad debt because the car dealers going back to inflation that are offering you right now 0% at 84 months they've already built in the inflationary price they've already raised the price of those vehicles and then they're discounting it at 0 so if you take a look at like let's say what a Ford f-150 was five years ago I guarantee you it's being sold for a lot more now at a lower interest rate so so a lot of the again cost push a lot of these manufacturers have higher prices those higher prices make the way down to the to the consumer and the consumer pays more and so you want to be very very very careful on how you do this but I'm going to come back to this and I just want you to know that savers are in big trouble with this pending inflation and and people are in good debt are actually going to be the beneficiaries of all this okay so what I when I found on the internet which I loved was this article here which was the rise and fall of the US dollar and I love this because it's the purchasing power of the US dollar since 1913 right up basically until last year and if you could find us on the Internet I did for this talk specifically for you but you can kind of walk through during the years this is when obviously we had the Great Depression this is when the Bretton Woods Agreement was right here which was which was when Nixon took the dollar off the gold standard and so you can kind of take a look at this and all the way through the dot-com the Lehman Brothers the Trump tax cuts and this has been the longest u.s. expansion since 2009 and you know while this is a coronavirus issue and a medical issue it is still an economic downturn period so it's not a financial crisis like we had before in 2008 and some of the other ones that are based around the banks and the lending but it's still a financial crisis and now you're starting to see this corporate debt default as you start to see you in this week a lot of big corporation big brands filing bankruptcy so this is what Robert Kiyosaki was trying to tell everybody in the book Rich Dad Poor Dad savers are losers and you know what that basically means is that you're losing the purchasing power of your dollar by savings and so you guys need to figure out how you can not be on the downside of this and that is the whole point if you have money in the bank and it's just and it's going to get deflated trust me guys it's going to get deflated we're going to have inflation nobody knows how much and and I do believe this there's gonna be a while before it hits but it definitely has to hit based on all the money that's coming into the economy right now and so just be super careful on what you're doing here because these dollars the US dollar has been falling for a very very very long time and since it became a fiat currency it's it's been even worse now let's talk about the yearly inflation rates okay so what you guys are going to see is we've had some pretty interesting inflation rates you know over over the years and this is in the 20s the 50s the 80s you can see these here these Peaks 20% 18% I remember this time when I was a kid and I was trying to buy a car and I remember my interest rate was 15% to buy a car now it's zero and so that was here and then since then really inflation has been kind of bumping along and I think that the government's done a pretty good job managing it unfortunately they've used all the tools in their tool belt so typically here they had an interest rate lower that they could use you know to kind of hedge the economy now we're here guys and I'm telling you you know there is nowhere else to go you can't lower rates anymore and so because they're already at zero and so moving to the next ten years this is what I wanted to show you from 2010 to 2020 these are the reported interest rates or I'm sorry the reported inflation rates that have that are on the internet for the last ten years through 2020 and of course you know who knows what this will be right now it's reported at 1.5 obviously it's gonna be a lot more now but this all calculated together means it was a 19 point one percent inflation during that ten-year period okay so I personally think it was higher doesn't really matter this is what it's been reported you know I personally think that it might be significantly higher but let's go back to that $10,000 alone that we were talking about when it comes to real estate because that is the point here what's going to happen is fixed rate debt is going to be paid off with devalued dollars so if you saved money here in 2010 and it's now 2020 it's worth 19.1% less as reported so that means that every dollar is worth about 80 cents okay and so those those devalued dollars are now going to pay off my fixed-rate loan and my fixed loan so my partner and I Ross we have hundreds of millions of dollars in loans on our apartment buildings and so as the economy starts to become inflated if we when we hold onto those assets and we will the debt will stay the same the dollar number will stay the same on the statement but they'll be paid off and devalued dollars and so we'll be making money there in addition to that the properties the assets themselves will be growing at the same time and so we're going to start to see a really increase in the pricing as well but probably what's going to happen in the in the interim is when all this money comes in the economy and it's just starting to happen there'll be a lag and so there's usually a two to three year period where there's more money in the economy buying all these goods and services so there'll be a window for you guys in the first few years so you're not going to see this right away but if I were you I would definitely expect inflation by 2024 probably pretty high and you're gonna start to see these the more and more dollars flowing around and a lot of the prices are gonna really jump seems to be very very interesting and the government's gonna come up with all kinds of things in the next year to try to keep this inflation rate down guaranteed but it's to be very very very difficult because the amount of money that they put in the economy so when we go back to this chart here I just want to point out that if you're saving money versus borrowing fixed rate debt that's paid off by somebody else that's one great way to hedge inflation through real estate there are many other ways and we'll talk about them in other videos so thank you guys very much for watching

Channel: Ken McElroy

Views: 143,787

Keywords: Business, Coaching, Earn Wealth, Entrepreneur, Entrepreneurship, Freedom, Get Wealthy, Hustle, Investing, Ken McElroy, Lifestyle Business, Personal Development, Real Estate, Real Estate Entrepreneur, Real Estate Investing, Rich Dad, Rich Dad Advisor, Self-Help, Success, housing market, inflation, ken, the impact of inflation on real estate, bitcoin halving 2020

Id: bDYc-vkcVLA

Length: 20min 29sec (1229 seconds)

Published: Thu May 07 2020