Inflation Induced Debt Destruction

Mike: Hey, it’s Mike Hambright from FlipNerd.com. We have a quick VIP tip to share with you from Jason Hartman, who’s going to share a tip on inflation induced debt destruction.

Jason: Okay listeners, say that 10 times fast. “Inflation induced debt destruction”, right? That’s a mouthful I know, but it’s a really awesome thing. It’s the hidden wealth creator that most real estate investors really never understand, although many of them have benefited from it over the years. Basically, what inflation induced debt destruction is, I kind of created that trademark term to illustrate the concept of how inflation pays down our debts on real estate.
One of the great things about being a real estate investor is that we can get most of the purchase price financed by a bank. It’s the most debt-friendly asset in America. After we do that, we can basically outsource that debt to someone else. We call them a tenant, right? In addition to the tenant paying down our mortgage, another invisible force is paying it down for us. That is the wonderful, beautiful force that most people despise but real estate investors love, and that is inflation.
The reason I call it inflation induced debt destruction is like this. Say, for example, you have $1 million worth of debt on real estate. Say you have 10 single-family homes and they each have a $100,000 mortgage. That adds up to $1 million. Say, for example, you got a 10-year interest-only loan on each of these properties. This is just for illustration, okay, and so you get the concept, because it will make a lot of sense in just a moment.
When you buy the properties you look at all of your statements and it says, “Okay, you owe $1 million dollars in mortgage debt.” Then a year goes by and say the inflation rate is 3%. The government is always telling us it’s lower than it really is, but that’s another discussion. Say it’s 3%. In one year you still owe $1 million, but the value of $1 million is now 3% or $30,000 lower. Really, inflation has “paid off” $30,000 in debt for you.
You didn’t do anything. You let the tenant pay the mortgage and you just sat there owning the properties, maybe having them appreciate, maybe getting some great tax benefits on those properties, and all kind of great things happening, including monthly positive cash flow. But one year later you owe $30,000 less.
Now fast forward 10 years. You’re only paying interest. Really your tenant is only paying interest on these mortgages. In 10 years, if you take the inflation rate over the years, I’ll bet you that you’ll only owe about $600,000, rather than $1 million, in real dollars, to the bank. Inflation is destroying your debt as time goes on. This is the hidden wealth creator in real estate investing.
It doesn’t really help for people who are flipping properties. This benefit goes to the buy-and-hold people, okay? Many investors think they got rich because the property went up in value, but what they don’t realize, Mike, is that behind the scenes, the debt was going down in value. This happened in the ’70s, the ’80s, the ’90s, the 2000s, and it continues to happen. It is a phenomenal benefit.

Mike: Awesome. Thanks for sharing that. That is a mouthful.

Jason: Inflation induced debt destruction. Remember it and profit from it.

Mike: Thank you for joining us for another FlipNerd Flip Tip.

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Mike: Please note the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.