The Upside To Inflation With Jason Hartman

Is there an upside to inflation? How does inflation affect rentals? Considering some challenges and changes in the market, Jason Hartman of the Complete Solutions for Real Estate Investors explains how inflation is often misunderstood and what we need to know about it. He discusses the upside to inflation in the real estate industry and shares some ideas about rent and how trading your dollars for stuff that has intrinsic value in an inflationary environment is a winning strategy. Tune in to this enlightening episode and gain more information to guide you in real estate investing in this inflationary environment.

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The Upside To Inflation With Jason Hartman

I am excited. We have Jason Hartman on the show. He is well-known in the real estate industry. He has decades of experience, and he’s going to be sharing a lot of valuable information with us now. Welcome to the show.

Thanks, Julie. It’s great to be here. It’s been great knowing you and Bob all these years, and now we are finally doing a show together.

Why don’t you tell us a little bit about yourself, your background, and how you ended up in this niche and space?

I have been in the business of helping investors buy properties nationwide in linear markets. There are about three kinds of different real estate market categories in the world or in the United States as well. They can be broken down into linear, cyclical, and hybrid markets. We like these solid, conservative, linear markets with good cashflow and stable appreciation rates. They are not crazy. They don’t make the news a lot, but they produce good returns on investments.

We have been helping people do that through my podcast and YouTube channel. We have helped thousands of investors do thousands of deals all over the United States in these good markets that we vet and recommend to investors. I got my start years before that in traditional real estate. I had a real estate company that I sold to Coldwell Banker in 2005. People say my timing was good in terms of how I exit. My first love and why I got into real estate when I was nineteen years old was to help investors. I love the investment side of the business. Income property is the most historically proven asset class in the entire world. That’s what I teach people how to do that properly.

A lot of people need to learn that right now. Are you seeing any challenges now with the market and the changes? Do you have any feedback that you would be able to provide with that?

The grim reaper has already hit the stock market and cryptocurrency market. We all wonder if it’s knocking on the door of real estate. Spoiler alert, I don’t think so. I think that real estate is quite solid looking for the future. Even if we should be concerned that this appreciation is coming to an end and there’s going to be a downturn in prices, people perceive this incorrectly. When they talk about the real estate market and whether it’s good or bad, they usually think good is when prices are going up, and they think bad is when prices are going down. What they don’t think about is that income property is a multi-dimensional asset class.

When you see prices rising quickly, that’s usually a result of good housing affordability, which means a lot of renters who are renting get sucked out of the renter pool into the homeowner pool. What does that do to rent? It puts downward pressure on rents. Whereas when affordability is low, we typically have higher interest rates. Prices aren’t going up, and maybe they are even going down. People aren’t excited to buy. They feel no sense of urgency, so they don’t buy, and they stay in the renter market. That renter pool expands, and it puts upward pressure on rents.

As income property investors, we can win either way because we have this beautiful multi-dimensional asset class. What we do is simply adjust our strategy. Sometimes our strategy is a capital gain strategy where we are making huge strides and appreciation. I know that feels better and sexy. It’s faster and more instant gratification.

We look at the value. We go to Zillow. We think, “I only paid that for that property, and it’s worth so much more now.” That’s not investing. That’s speculation. Investing is yield-oriented and cashflow oriented. When the market softens in quotes, it usually means rents start to rise more quickly. Everything’s been going up on both sides of the equation, both rents and certainly prices, as we all know, but rents are through the roof too, because we have a general inflationary economy and we have a significant housing shortage. Mark my words, “Rents always lag prices by at least 2 years, if not 3 or 4 years.” If you think rents are high now, you ain’t seen nothing yet. Rents have a long way to go up to catch the appreciation. They always lag the appreciation. The appreciation always happens first, and rents come up slowly.

Let’s think about why that’s true for a moment. Here’s why it’s true, and we all know this. Think about the dynamics of the market. When you look around your neighborhood, you see all these houses selling. They go on the market, and every house in an appreciating market goes on at a higher list price and everybody thinks, “Are they crazy? They can’t get that much.” They do. They get that much with multiple offers. Another person is encouraged to sell because it’s the greed factor. We are all thinking it’s a great time to sell. The market’s booming. Another person sells, and they keep setting higher comps on the values.

When it comes to rentals, everybody has a one-year lease. The landlord only raises the rents one time per year. Rents increase much more slowly than prices. That always happens. I have noticed that for decades throughout my career. I’m sure it was true long before I got here. Even if we see a slow down in the market, appreciation zeroes out in its level, nothing happens, and it’s flat lines, rents are going to continue to increase, and they have a long way to go to the upside.

I’m from Texas. It’s a nonjudicial state. I do a lot of owner financing for long-term notes and cashflow, but I do see the rental, and that’s how we come up with the owner finance model that we use for pricing. It is based off the rents in the area to make affordable housing for people to get into a home. I see it myself every year of how the rent goes up. I’m mind blown.

Another thing a lot of people are thinking now, as they are reading this. They are thinking, “Jason, you are being way too optimistic because these people can’t afford the houses. They can’t afford what they have now. The rent is already too high.” Remember that character years ago. I think he ran for office or something. It was in a funny meme that went around several years ago.

The thing that people don’t understand about markets in general, whether it be purchase market, rental market, or any market. It could be automobiles, houses, or groceries. The person who is renting or buying the house now in an inflationary environment is not the same person or family that will be renting it next time around.

What inflation does is it simply lowers the standard of living. The person that can afford it now won’t be the same person that can afford it later. It will be the person above them on the socioeconomic ladder that moves down that affords that house when the rent goes up and everybody moves down the ladder. That’s inflation. It sucks. It’s terrible. It’s a robber and a thief, but it has happened for many years. We have seen lots of inflation since the creation of the Federal Reserve in the early-1900s and throughout history.

If you think the rents or prices are high in the United States, go travel the world a bit. The US is quite cheap. I have been to 87 countries, some of them many times over. I love to travel. I was born in Europe. I was not born in the US. Believe me, the US is quite cheap. I’m not talking about New York City. I’m talking about America as a whole. Go try to buy a house in any area in Europe or rent a house. You will get a little crappy flat and you will pay a fortune for it, a big percentage of your income. In the US, you live much better. It’s a much higher standard of living here.

In your business, you are not having to pivot and make major changes because it’s constantly pretty much worked in no matter what market or economy that we have been in.

Investors do freak out a bit. They think, “A couple of months ago, interest rates were lower than they are today. Now they are much higher.” People get frazzled by that. No question about it. The reality is, it’s still a better deal. Let me give you an example. This is always blown my mind. Generally speaking, during a lot of the last several years, people could get a mortgage for about 4.5%, give or take.

The government told us the official rate of inflation was give or take. I know it varies. Everything varies. I’m making a very general statement here. Don’t send me emails about this. It’s a concept I’m trying to illustrate here. They told us that inflation was around 2%. People all day long were willing to take that deal. What was the deal? They were willing to take a 4.5% mortgage when the government was telling us inflation was 2%, but now, the government tells us the inflation rate is a whopping 9.1%. You can get a mortgage at around 5.5%. Let’s call it 6% for round numbers.

That means the official rate of inflation being 9.1% and a mortgage at 6%, you are getting paid 3.1% to borrow the money. That is a negative interest rate. You are getting paid to borrow. Before, the deal that people were happy to take all along was that inflation was 2%, and they pay 4.5% for a mortgage. They were paying a positive interest rate of 2.5%. They were paying versus now they are getting paid to borrow.

It is extremely rare throughout history. There have only been a couple of little points where this has happened since the 1940s. The consumer price index, the official measure of inflation has been higher than the mortgage rate. That is extremely rare, and we have that now. The benefit of the bargain goes toward the borrower.

I have never looked at it that way.

Most people don’t. They think interest rates were high because what they do is like what you are alluding to. They say, “A few months ago, I could have got a mortgage for 3%. This is terrible.” Back then, inflation was lower. It’s all relative inflation. You simply take the inflation rate and the interest rate. The delta between the two of those is the real interest rate. That’s what you are paying.

When you break it down like that, it opens your eyes to the opportunities that are out there.

In case somebody doesn’t get that, they are thinking like, “What are you talking about here?” Let me explain it a little further. Interest rates represent the cost of money. That’s the price for money. If you want money, you have got to pay a certain price for it. You pay an interest rate. That’s the cost of the money. If you go to the store and buy a loaf of bread. A loaf of bread has a cost. Interest rate is the cost of money. That’s all it is over time.

It protects lenders in this equation called the time value of money, but inflation represents the debasement or the devaluation of money. When we borrow, we get to pay the lender back in cheaper dollars. Now, officially, the government tells us those dollars are getting cheaper at a rate of 9.1% per year. Unofficially, I think the inflation rate is much higher than that. I think it’s about 15% to 17% in reality. Most people will agree, but we all have different inflation rates because we all spend differently.

We are paying the money back as it’s being based at 9.1% a year. If we have $100,000 in the bank, we are going to pay an inflation tax on that money of $9,100 every year. If we borrow $100,000, we are going to pay it back at a $9,100 discount every year. This is a strategy I developed several years ago, and I trademark the term. It’s a mouthful. You have heard me say it before, but for your readers, it’s called Inflation Induced Debt Destruction, or IIDD for short.

I like the whole new view of it. For investors now, would you feel the strategy would work for any new and seasoned investor? Do you have a lot of new investors come through your training?

We have both. We have seasoned investors. We got one that’s planning to buy 500 properties through us and is over 130 so far through our network. We have some new investors that are buying their first property. We got all types. It works for everybody as long as they don’t pay cash for the property. If they pay cash for the property, they are going to get other benefits but not Inflation Induced Debt Destruction because they don’t have a mortgage on it that they can pay back in cheaper dollars.

One of the beauties of income property as an investment. In most things in life, if you go buy a car or you buy a piece of furniture, the deal you agreed to when you bought it is the deal you got forever. That’s the deal. It ends when you buy it. With income property, the beauty is you never commit to the deal. You buy it, and you paid a certain price at the time you bought it, but you can always renegotiate the characteristics of the deal along the way because you can refinance it. You can add value to it. You can change the rent or the income it receives. You can get income from other sources. You can change the whole characteristics. You could buy a property now that is a long-term rental and turn it into an Airbnb short-term rental. You can change these things along the way.

You can do creative financing what you do. You can do a lease purchase. You can do all sorts of great things to change the deal. You constantly get to renegotiate the deal. It’s one of the few assets in the world that offers you this beautiful thing. You can buy it and pull all of your money out of it and still own the asset. Show me where else you can do that. I can tell you. You can do it as a corporate raider on Wall Street, the Big Wigs, Ivan Boesky, T. Boone Pickens, and Carl Icahn. That’s what they do. They buy companies with leveraged buyouts. They saddle the company with debt. They make the company pay back the debt that they saddled it with, and they get all their cash out. That strategy does work in a big way, but most people don’t have access to that. We all pretty much have access to buying a house and doing the same thing.

I love the feedback and all the information that you provided. If you could give one piece of advice to any new or seasoned investor, or yourself, like if you could go back several years, what would be the one thing you would maybe suggest or say that could change the trajectory for someone?

In life, currency, money, dollars, and pieces of paper with dead presidents on them. They have no intrinsic value. In an inflationary environment, which is pretty much the environment we have all lived in all our lives, especially since Nixon took us off the gold standard in 1971, stuff has intrinsic value. We want to trade our dollars for stuff as quickly as possible because we know for sure that the dollar has been and probably will continue to be devalued, but the stuff has intrinsic value.

I’m in my office at my house. You see a wall, a ceiling, and there’s a floor. What are those made of? They are made of things. The ingredients to a house are these ingredients that every human being honored needs. Every person needs food, clothing, and shelter. Let them rent that shelter from you. Think about the ingredients of the shelter for a minute. The ingredients are concrete, lumber, glass, steel, and copper wires in the walls, a lot of petroleum and energy are used in the construction of the house, and labor, which is very scarce.

This is a low-tech item. There’s not likely to be any big disruptive technology that changes the cost structure of houses, apartment complexes, or anything. Trade your devaluing dollars for stuff, especially real estate stuff, where you can get the bank to lend you maybe 80% of the value of it when you buy it. You might be saying, “I don’t like debt.” With income property, we don’t pay our debts. We delegate the responsibility of the debt repayment of the mortgage to the tenant. They have to pay the debt. We tell them, “You pay me rent. With that rent money, I’m going to pay the debt. Hopefully, I’m going to keep a couple of $100 every month extra.” It will be called positive cashflow. Trade your dollars for stuff, things that have intrinsic value. In an inflationary environment, that’s the winning strategy.

Thank you so much, Jason. It was such an honor to have you on the show. Thank you again for being a guest. If people want to get more information about you, we are going to send them to UndergroundWealthSecrets.net/Jason.

We have only touched on some of these topics. They can get a lot more on my podcast and YouTube channel. I didn’t have time to share a bunch of my slides with you and charts and graphs. If they want those, they can get them at JasonHartman.com/slides. They can download a huge slide deck with all kinds of great info that they might like. I want to provide as many resources as possible.

We appreciate it because we are trying to add as much value and information for people as possible. Thank you again.

You are doing it. Keep up the good work, and happy investing to you and everybody in your audience.

Thank you so much. We hope you have a wonderful day. Thanks, Jason.

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About Jason Hartman

Jason Hartman® has been involved in several thousand real estate transactions and has owned income properties in 11 states and 17 cities. His companies help people achieve The American Dream of financial freedom by purchasing income property in prudent markets nationwide. Jason’s Complete Solution for Real Estate Investors™ is a comprehensive system providing real estate investors with education, research, resources and technology to deal with all areas of their income property investment needs.

The United States offers nearly 400 distinct and diverse markets while most media pundits characterize the “housing market” as if it were a single entity. We realize they do this to cram a cogent comment into a simple sound bite. Real estate cannot be described that simply. It’s just not accurate. There is NO such thing as a United States real estate market. However, there IS an Atlanta, Georgia or a Dallas, Texas real estate market. To that end, we scour the entire country with an “Area Agnostic™” approach and select the most suitable and sensible markets to recommend to our investors so they don’t waste countless hours doing it themselves.

Through our podcasts, educational events, referrals, mentoring and software to track your investments, investors can easily locate, finance and purchase properties in these exceptional markets with confidence and peace of mind. Visit www.JasonHartman.com and one of our investment counselors will provide your free portfolio makeover. We are here to help!