The IDEAL Investor Show: The Path to Early Retirement

Ep 85 Inflation, The Devaluation of a Dollar

• Axel Meierhoefer • Season 2 • Episode 8

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Hello, and welcome to another episode of the The IDEAL Investor Show season two, where as you know, by now we're focusing on what are the things that influence cash flow? How can we position ourselves? What can we do to increase cash flow, and one of the topics I want to address today, that really has an impact, but it's also, I believe, sometimes a little misunderstood. And that is the topic of inflation. So just to get started on it, I mean, most people, when you say, Okay, you see it in the media, you see it all over the place in the news, and so forth. Whatever the numbers, the values are, that the government has measured for inflation, and they published that once a month, and then they also have an annual number. So the government number might say something like 6% 7% 8%. So that's kinda like the official inflation that we're being told. Now, the way the government is calculating it has changed over the last years and decades. And if you really go and look at how it has changed, you will find that the changes to the way it's being calculated, have always come when inflation started rising, and the government didn't want to admit what the real inflation is. So they changed the way it's calculated to try to lower the number just because it sounds better to say inflation is 5%. And if it's 10%, the other thing is what they started doing, for example, and part of it is also interesting for us as investors in residential real estate is that you can say, I take a basket of stuff, I put it all together. And then I just compare from month to month, how much more it costs to buy this stuff, compared to a year ago. Now, what the government did in one of the recent changes is to say where but certain things are more important in life than others. So having a place to stay and having food and things like that is maybe more important than other things. And so nowadays, the inflation aspect have anything to do with shelter, basically, your housing and your apartment, your rent those kinds of things, has more weight than for example, having a car or buying a computer and stuff like that, and why that sounds on first glance to be kind of sensitive. What it also does is it pretends that certain things, then have different weights react the same way. Now, if you're thinking about housing prices, rent prices, and stuff like that, they don't jump up and down, like the stock market, for example, housing prices don't jump up and down just because there is a war in Ukraine and oil and gas prices go up. And so you see that within a month or two at the very latest at the gas pump, you won't see that kind of a reaction in less than a quarter, or oftentimes in less than half a year to a year actually in your housing costs. But housing is a huge component of the government inflation. So what we're all experiencing, when we actually go out and do something is oftentimes more dramatic than what we hear in the news. So when you go out to a store and you buy meat, or you buy vegetables or stuff like that, you will see the true inflation because you will see how much more you have to pay to buy the things that you buy all the time. And we have seen anything between 10 and 20 30% inflation for certain things, right. So there's another bit of a deceit and misinformation because the government wants deliberately wants to have that number as low as possible. And I would like to encourage you from a cash flow perspective to realize that that is in government intention, it may not actually match what you're experiencing day to day life. Now, the other thing that is important is it is always portrayed that stuff, just as if it had a life of itself gets more expensive, costs more what is really true, if it were portrayed and communicated in the right way is to say it takes more of your money to buy the same thing, right? If you think about it, if you buy a pound of tomatoes at the same point with the same right and the same quality, everything. It's not that tomatoes have changed in some way. And by the way, the same is true for housing, right? If your rent increases, that doesn't necessarily automatically mean that the House has changed. What has actually changed is how much money how many dollars do you actually need to use to get the same thing and if you think about it that way, that means the dollars that you use last month or last year bought you more which In normal people's term won't mean they weren't more valuable, because you needed to use less of them to buy something. So the reality of inflation is not as we always been taught, prices increase the reality of inflation is the value of the money that we have decreases, we need more of it to buy the same stuff. Or if we use us the same amount of the money, we get less, which means the money is worthless. So that's basically a true explanation of what price inflation really is. It's the deflation of the value of our currency or our dollars. Now, the other part that comes with that is how do we compensate in an economy? And one way to compensate is that people say, Okay, what if it costs me now? $150? When it cost me under $20, to go shopping once a week, then where do these other $30 come from? And initially, what most people assume, and it's very rarely true, but most people think, well, maybe this is just temporary, and they have some savings. So they take the difference, these $30 difference from savings. Now savings, most people don't have a whole lot of savings. So the next thing that is being done is to say what if it's really temporary, and we have heard, by the way, also 2020 2021, the Federal Reserve the government, everybody said inflation is temporary, or transitory was the new word that they use? Well, ultimately, they found out it's not the prices didn't really across the board come down to anything that we were used to in 2019 or early 2020. So now we have a choice, we can, on the one hand, say okay, I still need the core things for life. And therefore you can put some of the costs the additional costs on a credit card. Now, that is kind of only really delaying reality, because everybody knows, sooner or later, you have to pay for the credit card. The other thing is when you say, Okay well, that's a regular person, most people to get the money in the first place, you go work for the money, you exchange your time with an employer for money, that's what it's called a wage or salary. And if you do a good job every month, you get a certain amount of money for your job. So when you see that everything gets more expensive, the next reaction is, well, my savings have been used, I can keep putting it on the credit card. So the only other place to go is to say, Okay, I need to ask my employer to give me more money. And in a way, what you're really saying is, hey, employer, the money that you have been giving me lately doesn't buy an equal amount of stuff anymore. So if you don't increase the amount of money that you're giving me, you're basically telling me that my value of the work that I'm providing to you is not as much as it used to be before in the vast, vast, vast majority of cases, the opposite is true. The longer somebody works for an employer, the more valuable they become, because they have more experience, they've seen more things, they've gotten better at doing stuff just even if it's just by repetition. So the value should increase or the employer rather than decrease. But if you get the same amount of money, and everything costs more than that, in a sense, saying the value of your work has gone down. So what do you do you know, it hasn't gone down? Therefore you go and say. Hey Mr. Mrs. Employer, I need more money. So I can at least by the same stuff as before, that is considered wage inflation. And what that does is if you think about it, first prices increase, meaning the money itself gets less valuable, then you go and say, well, I need more money for my work, because it's still at least as value as before, if not more, so you'll get more money. Now you can buy this stuff again. But what happens with the employers who are the employers, the employers are the companies that actually put the goods and services out there that you're consuming. If you employ a farm, and you go to the supermarket, and you buy vegetables and fruit and meat that comes from the farm. So you're basically part of the production of the stuff that goes into the economy. If the cost for the employer goes up, because you ask them rightfully so to get higher wages, they will say what if we want to pay our employees higher wages, we need to increase our prices. And what happens is that's called an inflation spiral, that first the prices increase, then the wages increase, then the price is increased more than the wages increase more, and so forth, and so forth. And obviously, people who use the vast vast majority of their money for their daily life expenses are always heard the most. If you make $10,000 a month, and you only need 2000 to cover your life expenses, then all the other 8000 are still there to do something else. And if you increase it from 10,000 to 11,000, you can still use like 2000 or 2100 or 2200 and actually have more left over than before but if you make 2000 And you need 2000 Then you're more wasn't affected by these inflationary price increases. Now, when you turn all of this and this is, you know, keep in mind be doing this as The IDEAL Investor Show. What does this mean from the investing perspective? Number one, for those of you who live for rent or have lived for rent and have been wondering, why is my landlord, the owner of the property, increasing the rent, while there are similar aspects to understand. So, in 2020, and 2021, and to some extent into early 2022, we all have observed that the prices for houses have gone up. So, obviously, that means, if I have a house that I bought for $100,000, I still own that same house, let's say I bought that in 2019, for$100,000. But all the houses around it have gone up, and they are now all worth $125,000 Over the last three years. And that's actually pretty realistic numbers. What does the community do? Every two years or so the tax assessor goes through the community and says, let's look what the value of the houses down the street are worth. And if a lot of houses similar to mine are now worth 125,000. But my tax rate is being currently calculated on my purchase at 100,000. Guess what the city government is going to say what everybody that has houses worth 125,000 also needs to pay taxes for houses versus on a 20 five.so my property tax as the owner goes up, where am I going to go to get some of that increase compensated to my tenants, that's one of the reasons to increase rent. Now the next thing is, every time I'm going to have something repaired because a tenant called and said, hey, the faucet is leaking, or I need to have a replacement on the carpet or this or that if you look at this 2019, early 2022 to now 2023, you will find out all of these things are the services or the materials, everything has significantly increased. So obviously, my costs to keep the property operating properly, so that you have good value as a tenant have increased, where can I go to compensate for the increase in rent the last part, and that's why I first started out when we were talking about the initial parts of inflation, to try to explain how this is all together is the house, as I mentioned, still gives you the same value that it gave you two and three and four years ago, but what we don't have is the same value in the money. And so in that sense, the value of occupying a house or renting or leasing a house is shown in the amount of currency or the amount of dollars you have to give for it. So since the value of the property, if it's kept up well, which we always do with our properties remains the same, I need to have more nominal dollars to keep it in that way and be able to actually invest again and keep it well and keep it running. So it's not that the landlord or the owner of a property deliberately wants to make their life hard on the tenant. But it's because both on property taxes management fees, and any kind of repair on the house to maintain the value that you want to give to the tenant has increased there is no choice than to also increase the rent, let's bring this full circle. Why are we actually doing the approach and recommending the approach and idea of Escrow that leads you to the time freedom point, the idea is that you get a portfolio of properties where each property has ultimately$200-400 of positive cash flow. Now the time horizon is 8/10/12 years. And if we have inflation over those 8/10/12 years, which is very likely it just used to be very low. Now it's relatively high. That also means if we say today, if I could just slip a finger and create an instant portfolio to cover all my life expenses, I would need to have let's say $4,000, well, in 8/10/12 years with the information that we have, that same number probably needs to be 5000 or $6,000. And the only way to get there with providing similar or equal value in the properties that you have and that you lease out and rent out to your tenants is by step by step increasing the rent. You're not getting rich by that in some way like some people make you believe but you increasing the nominal value of the number of dollars you get to steal then in 8/10/12 years when you reach your time freedom point cover your life expenses because they will have gone up significantly from the $4,000 it takes now. So inflation to come back to this point and how it actually relates to cash flow is mainly the devaluation of the money that you get the dollars that you have in your wallet or in your bank account. And so what it means is on every level where you use dollars to pay rent to make an end estimate to buy groceries, if we have inflation and the dollars are less valuable, you just have to find ways to get more often not because you want to harm somebody, but because you need to have the equal value for the value that you're actually putting out there, the number of dollars need to match the value of what you did. And if the value was $1,000 2 years ago, then with the inflation that we have, it needs to probably be$1,050 or $1,100, and rent going forward. So I hope that gives you an idea and understanding how inflation impacts what we do, how much money we make, why do we need to ask for higher wages? And why do investors and landlords need to ask for higher rents and lease numbers, because it's all connected in this way. And as the individual dollars get less and less valuable, we need to have more of them to buy the same thing. So I hope this gave you a good explanation on the impact of inflation. And what we always need to do is to keep an eye on our cash flow. Because when we look at how is our time freedom point to be calculated into the future inflation is obviously a very important component. So if you see us with this episode on YouTube, please like subscribe, and give us a comment. If this is something that you consume on podcast, please give a comment, give us a rating and download it because that's really the most important thing to help us make the podcast more successful. So be well stay safe. And I'll see you in the next episode. Thanks for listening. And I hope you enjoyed today's episode of The IDEAL Investor Show more info and the links we mentioned during the show in the show notes or you can go to our website at idea where to go.com and sign up for the Apple podcast link. And if you'd like to talk to me sign up for a strategy call. Hopefully you want to share what you learned with your network and bring more people in we are really eager to hear your comments and until next time, be well stay safe and ciao.