Let’s talk about a word. This is a word that divides the wealthy and the struggling (or soon to be struggling). This word has more negative impact on those who wait to own than they could ever even fathom. The word is ‘inflation.’
If you winced at that word, looks like you are already on the wrong side of the line. But wait, why wouldn’t EVERYONE hate that word? That’s because most know what inflation is but only enough to get hurt. So the question remains..
What is inflation, REALLY?
The economic definition (I just googled it) is ‘a general increase in prices and fall in the purchasing value of money.’ Essentially, it’s the cost of goods and services going up every year. In the United States, the Federal Reserve attempts to keep it around 2% to keep things from getting haywire. Anything below is bad for economic growth and anything higher is bad for most of the country as wages tend not to track inflation directly thus, making most the middle class and below less prosperous and therefore further tilting the scales.
Now, I hope you were really paying attention to that official google definition. Why? Because the back half is the real killer. ‘fall in purchasing value of money?’ Oh snap. That means the US dollar gets devalued every year and usually around 2%. Currently that number is almost triple. This is a problem for most people. Let me explain.
Let’s look at a simple real estate example.
Real estate tends to track inflation and has been going up 3 to 5% per year on average. Add in lack of supply due to a once-in-a-century pandemic, a dash of record-shattering low interest rates (this is what we were talking about with the Federal Reserve), and a bit of an already growing issue of lack of housing in general and you get closer to 20%.
What does this mean to YOU? Simply put, if you waited last year to buy real estate because you thought it was going to crash, your penalty for guessing wrong is paying 20% more. For example, a property in Orange County, California worth $500,000 a year ago is now $600,000. This is how people get kicked out of the game. Every year you wait you will be further behind because you cannot save enough to catch up with ever-rising prices aka inflation.
Robert Kiyosaki said it best in an interview. “You will never be able to save enough money to get rich because the Fed can print it much faster than you can earn it.”
Are you ready to really get your head checked? Saving money to buy your dream home is a terrible idea! Why? You will never be able to save enough to keep up with inflating prices of assets in a nice area unless you already have a very high income and/or are expecting a huge promotion. What we recommend is buying something you can afford now so you have a good hedge against inflation. This asset will help mitigate all that erosion on your pocketbook since now you at least own an asset that rides inflation. With said asset, you now benefit from inflation. As inflation increases, so do rents and so does the appreciation of your home.
Inflation makes the poor poorer and the rich richer because the poor do not own assets.
What can you do?
Buy assets so you can surf with the big dogs and ride the wave of inflation. But how? There are many vehicles for creating wealth by hedging against inflation. Real estate is one of them (and our personal favorite), stocks is another, and hell you can even make a case for crypto currencies.
Want some real life examples from our very own portfolio?
Exhibit A:
AnVi bought a triplex (infamously known as the Quincy dilemma that almost bankrupted us) in July of 2018 for $256,000. Last month it appraised at $370,000. That’s a 14.8% increase per year or 44% in 3 years! In Bakersfield? Yes. In Bakersfield. You mad yet?
Exhibit B:
AnVi bought a duplex in Fontana for $530,000 six months ago. This property is now valued at over $600,000. That’s $70,000 in six months. Did your salary increase by $70,000 in only six months? Neither did ours. And neither did our partner on this asset. By the way, that partner is one of our moms here at AnVi.
She grinded and grinded and busted her hump her entire life to raise 3 boys and keep a roof over everyone’s heads and at the end of it all, like a champ, was able to have almost $150,000 saved in retirement. If everything remains constant, she will have essentially made the same amount in a little over a year. Ok, now you’re mad.
With AnVi’s assets combined, if we assume just a 5% appreciation every year, we will passively earn more than $175,000 per year forever. That’s more money than most people make working full time for an entire year. And now.. WE’RE MAD! Mad that we didn’t buy more assets years ago!
-Your friends in investing,
Vince and Andrew from AnVi