Inflation is a big topic around the Platinum Properties Investor Network office, though not for the reason most might assume. The thing is – we love inflation because it makes us money as income property investors. Long time readers of this blog are probably already familiar with the idea espoused by Jason Hartman that goes something like this: if inflation is the reality of the modern world, you might as well use it to create wealth and establish financial independence.
To understand how this works, put your thinking hats on because we’re going to do a bit of backwards contemplating. Backwards, at least, to the Wall Street investing model that has been crammed down our throats for decades.
Inflation devalues your money, right? We all should be able to agree on that. Due to rising prices, a dollar one year from now buys less in the way of goods or services than a dollar in your pocket today. That’s pretty simple. Prices rise and your money buys less. As a consumer, we understand the ill effects of this side of inflation perfectly. Let’s take this scenario a step further. What is the opposite of money? It doesn’t take a genius to realize the answer is debt. Debt is the opposite of money.
What we’re suggesting is that the way to grow wealthy is to hold debt in the form of a well-structured mortgage tied to a piece of investment property; well-structured simply means long-term and low-interest. In a perfect world, you’ll keep refinancing those properties until you die, never paying off the balance.
Why the heck should you not pay off the balance, you might be wondering.
Think of it from the banker’s point of view. The principal amount of the mortgage represents a pile of money you’re going to pay him at some point in the distant future. For you, the value of that borrowed money is locked in the moment you sign the note. The banker is not so lucky. The real value of the money you owe only diminishes with the passage of time, thanks to the effect of inflation. Even if you pay nothing but interest on the note for 30 years, never paying back a cent of principal, the bank loses value and you gain it.
That’s why real estate investors should pray for inflation. Is there a limit to how much inflation is good for your investment properties? Theoretically the answer is no, but hyperinflation can cause society to go to pieces so fast we get hit by the shrapnel. That’s not in the best interest of anyone (Top image: Flickr | Lel4nd).
The Jason Hartman Team