Episode #18: The Most Amazing Part of Owning Rental Properties That Nobody Talks About
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When you build a long-term rental real estate portfolio–and you use long-term debt to do so–you enjoy a benefit that most people don’t seem to know, understand or talk about: the power of inflationary forces on your debt. In this episode, Jeff explains why many Thoughtful Real Estate Entrepreneurs love long-term debt on rental properties, and how the macro-economic force of inflation helps them build wealth.
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References in this Episode
The Road Less Stupid, by Keith Cunningham (the real Rich Dad)
The Real Estate Guys Radio Show
Here is a page where they discuss the point:
“If the dollar is doomed to continue its 100+ year decline … then debt and real assets are your best friend. Debt lets you pull future dollars into the present, where you can use them at today’s purchasing power (stronger than the future’s) to acquire things of real value…. Over time, as the dollar falls, the dollar price of the property rises while the debt stays fixed.”
The theme song is an excerpt of “No More” off the album “Golden Era” by Forest For The Trees. You can check them out on Amazon, iTunes, and Spotify.
Full Episode Transcript
This is Jeff from the Thoughtful Real Estate Entrepreneur. Welcome to episode number 18 of Sleaze-Free Real Estate Investing, a show for those of us who’ve never felt at home in the We Buy Houses crowd. When this show we take a standing It’s what we call the low ground approach the mainstream guru seminar distressed seller approach that ends up giving real estate investors a slimy reputation. And instead we discuss the strategies, tactics and philosophies that we call the thoughtful way. And enlightened approach to real estate entrepreneurship focuses on constantly sharpening the sophisticated real estate entrepreneurs, three most critical capabilities, seller relations, skills, deal architecture, skills, and opportunity vision. When all three of these capabilities are successfully in motion, you can make an excellent living today and build long term wealth, while creating value for everybody that you touch along the way. Show Notes for today’s episode are at WWW.thoughtfulre.com/E18.
Please do yourself and do us a big favor by hitting the subscribe button in your podcast app. Now In the last episode, we discussed the two different strategies for achieving financial freedom through cash flow. And we’re going to continue talking about rental properties which is related to last week’s topic as well. So please go back and listen to that if you haven’t already.
And in today’s main course, we’re going to continue this conversation, we’re going to discuss the most amazing part of owning rental properties that nobody talks about. But first, as always a little bit of food for thought because as thoughtful real estate entrepreneurs as trees, We love to feed our minds with things to think about.
And Today we’re thinking about thinking, we’re thinking about something called thinking time. Now This is obviously top I just the name of it, A perfect idea for some trees. And I’ve been doing this myself since learning about it. Now, a few weeks ago, I was at my Genius Network session in Phoenix, Arizona, and we had a guest, a guest speaker who was Keith Cunningham. Keith Cunningham, interestingly, very interestingly, is the real Rich Dad. Apparently, Robert Kiyosaki once sort of acknowledge that there were two people who had inspired the real Rich Dad character in the Rich Dad Poor Dad books, and the Keith Cunningham was one of those people. So I’m sitting here listening to Keith Cunningham talk about something that he discussed or describes as thinking time. Now thinking time is an outline and Keith newest book, which is called the road less stupid, I’ll put this link in the show notes. And Joe polishes, Genius Network called this the best business book he’d read in a decade, and I’ve been reading into and it just enjoyed the heck out of it myself.
The book is about the idea that oftentimes the biggest success you can have is actually avoiding dumb mistakes. So the book talks a lot about the types of dumb mistakes that people in business tend to make and how to avoid them. And he goes on to sort of explain, like read the beginning of the book, and what are the key ways to avoid those dumb mistakes? Dumb tax, as he calls it, avoid paying the dumb tax is to do thinking time and think things through in advance and identify your blind spots. Interestingly, Keith actually has an extensive real estate background, in which he paid a large dumb tax by his own acknowledgement at one point. And you know, in real estate we are we can hear people’s use the expression is sometimes the best deal you do is the one you didn’t do. I don’t know if you’ve heard that before. But I’ve certainly heard that before, too. And it really just goes to show that sometimes, avoiding a deal can be the most profitable thing you could do. If you don’t step on that landmine that could have really start taking you down and taking you out.
Thinking time is a regular and a routine discipline. It’s about a quote, but having a quality question. And creating a lot of solutions to this quality question. It’s like the mind is remarkably good at answering the questions you put in front of it. So it’s actually really dangerous to put bad, badly formed questions in front of the mind, because the mind
will do a very good job
of answering those badly formed questions.
You know, for instance, if you
ask yourself, why am I so fat, then that you’re putting this question in front of your mind about being fat? Whereas if the question you asked yourself were, How could I routinely make better food choices? That’s a very different way to frame the same type of
in a way that’s going to create more positive answers and positive results, Because because the way the question is framed to the power
of your mind,
So you have to make sure that the questions you put in front of yourself and thinking time are
really good quality questions. Keith recommends doing thinking time for 45 minutes with a timer, going someplace without any distraction at all, certainly no email, you’re certainly not sitting in front of your computer. It’s just you and a blank notebook, a nice pen, and one or two related questions on a topic. He even recommends having a specific place that you go that you don’t
sit in this chair really any other time, except when you’re doing
thinking time, or you don’t use this pen or this notebook anytime, except when you’re doing thinking time. So it’s kind of a dedicated ritual. And you pose this one to two questions that are related to yourself, and you just spend the 45
coming up with so many answers and solutions as you possibly can, without worrying about their quality without editing. Just coming up with a big brain dump of very focused solutions, your
brain is only thinking about this one issue at
this time. So I encourage you to incorporate thinking time into your life and your business too. I encourage you to grab the book, The Road Less stupid. And again, I will put that in the show notes as well. But I think you’ll find that the problems that are on your mind are more manageable, and that there are indeed a lot
of solutions and probably some very
good solutions. If you do this thinking type exercise, and you do it well, I think it will really soften the blow some of the problems you feel like you
might be facing. That is today’s
food from you know real estate investors get so caught up in which strategy
teams and what is the best way to do flipping wholesaling is
or make money with this
with fat with the shortcuts, tips and techniques.
But we often forget that all deals have one
thing in common nothing Is it there’s a human on the other end of the transaction, especially when you’re doing business, the thoughtful
way and working directly with sellers.
If you could master the
art of working with those people in a way that gets you to a yes that you need from them. It gives you both
a win, then it’s going to transform your entire business. And that’s why I’ve created a brand new webinar
that I want to invite you to attend. It’s called How to earn an incredible living, and build lasting
Welcome to real estate by mastering the uncommon art of selling relation skills
without working harder and more doing more deals. what you learn in this free webinar presentation
is primarily based on three secrets secret number
one is how to easily uncover
the hidden motivations
of every seller. secret number two is how to confidently meet face to face with the
seller and come across as a trustworthy Pro.
And secret number three is how to market the sellers
in a way that makes the phone ring and helps you buy properties that nobody else even knows. So come
join us on this free webinar. To
register all you have to do is visit WWW dot seller
mastery.com seller relations mastery com and we hope to see other one.
Alright, moving on to the main course of today’s episode. And today’s topic on thoughtful real estate entrepreneurship is what I call the most amazing part of the morning rental properties that nobody talks about. Now Today, we’re going to have a little bit of a different topic than some things we normally discuss already get a little bit into economics here, We’re going to get a little bit into the discussion of debt. And I have no desire to stand up and debate somebody about whether debt is good or bad or the definition of good debt versus bad debt and whether you should or should not have done. I just want to illustrate it really interesting.
And tell you how I think about it, and how I’m incorporating
it into my business. So You may ask yourself that why is this topic for thoughtful real
estate entrepreneurs, this isn’t a show on
economics? Well, it’s because of thoughtful real estate. Entrepreneurship isn’t just about how we work with sellers and how we relate to people. That’s a big part of it. But it’s also about how we thoughtfully choose to structure
our portfolios, how we deliberately and very intentionally
use debt or don’t use debt in certain scenarios, how
we structure everything with
intent and purpose and not just sort of by happenstance, It’s about how we are willing as trees and able to be thoughtful
enough to see that there are other perspectives about what we are actually doing,
not just in the short term, but over the long term as well.
And This is a story about being thoughtful about the long term
of our real estate endeavors,
and giving you some new considerations to
think about as you put together your long term plan, as well as your short term plan.
So I want to tell you just
a quick story when I was a kid, my parents divorced when I was eight. And I was very close. As a result to my grandparents, I was very close to both sets of grandparents, I was lucky to have all four of them. But I was especially close to my maternal grandparents. And we lived very near them. And I was very, very close with my grandfather, my grandpa. And when I was a kid, of course, my grandpa would tell me stories. And I remember I think about his hamburger story. There’s hamburger comments and anecdote a lot. And he would often say,
you know, when I was your age,
We would go down to the local cafe, the local grill,
And I could get the best burger you’ve
ever seen in your life for five cents. So
my grandpa was born in 1927. So,
you know, when he was my age, at that point, it was probably this bright 1935 to 1940 ish, somewhere right in there.
And of course, I would say
That to me, you know, even as like a 10 year old, even in the late 1980s
seemed ridiculously cheap.
But to him in the moment. As a kid, it wasn’t cheap.
But it maybe wasn’t expensive. But
it was just the appropriate price for a hamburger
At that time. And now as as an adult right with grandkids, you can look back on that and see Oh, yeah, five cents, that that seems like nothing compared to what that same burger would cost today. But in the moment five cents was that was the price that you paid for an excellent burger in his children. Over the years, my grandpa would tell me more similar stories, you know, similar kind of theme,
he would tell me about the first house that they bought, you
know, that was around $5,000. And about 1952 them Paying $5,000 for houses a ton of money in 1950.
You know, saving up like 750 bucks for a down payment was a major ordeal a major accomplishment to be able to save up that amount of money. And so their mortgage and other would have been around 4000 to 5040 to 50 seemed
to them At the time
like an astronomical figure.
Because at the time relative to what
was going on, then That was a large amount of money. Now to us today, those numbers are laughable. I mean, I’d kill that a mortgage balance of just 40 to 50. Right.
Some people have payment some monthly basis and
40 to 59 entire mortgages and
monthly payments. But relative to the time,
it was normal an average for my grandpa. So today,
a mortgage of 40 to 50 would be
no big deal, right? Because incomes are
much higher than they were at that time as well. You know, I looked up what the average household income in 1950
it says it was about 30 $300 a year 30 $300 in 1950
Google says it’s over $60,000, I thought maybe it’d be even a little bit higher than that. But even if that that’s 20 X what it was in 1950.
And even my grandfather himself
in the early 2000s, when he was still with us would look back at that 40 to 50 mortgage and feel like it was small. I mean, he would remember feeling it felt big at the time, of course, right. But from his modern 2000s perspective,
he would feel like he was no
big deal In hindsight, especially compared to the mortgages that he would have later in life,
He would understand that his perspective have changed. So
What is this phenomenon called? Well, of course, It’s called inflation,
right. And you know, that
we all know about inflation. And we kind of tend to think of inflation as being defined as quote, you know, things get more expensive over time. But what inflation really is, is not so much the price of things going up. It’s the purchasing power of the dollar that we use to buy those things going down
over time. So For instance, house
isn’t 50 times more valuable to humans today than it was in 1950. It might cost 50 times more, but it’s not 50 times more valuable, Right? It’s not like in
two In 1915. We said yeah, you know, we cut
we humans, we kinda like living indoors, but it’s still a big deal. And in 2019, we’re like, yes, we humans must live indoors. Now, we’ve always wanted to live in dorms, the value of a house in terms of the value that we place on it hasn’t changed. But the amount of dollars we have to exchange to get it has changed a gallon of milk today, is it 50 times more desirable to human beings, and it was in 1950. It’s just that if you want to buy that house or buy that gallon of milk, The number of dollars you have to trade for it has increased 50 x over time.
So Okay, inflation,
which by the way, the Federal Reserve intentionally regulates to ensure that inflation happens and has done that for the past hundred plus years.
Inflation is the declining purchasing power
of the dollar. Okay, that’s really what inflation is.
And that means in the spring, This brings us to
our first really big point,
When that means
is that tomorrow’s dollars. Not literally necessarily
tomorrow, the dollars in the future
will be less valuable
than today’s dollars. Just like today’s dollars are less valuable than the dollars at the time, my grandma my first house $5,000 and buy you a whole whole place. A whole house in 2019 $5,000 will
me the furnace inside that house. And you extrapolate that forward since 2075. Who knows it’s likely that $5,000 might be the cost of a pack of light bulbs For that house. And that statement there that it 2075 pack of light bulbs might cost $5,000. Well, that sounds crazy to us today. I know. But think
about my grandpa,
Wouldn’t he have said the same thing if someone
and told him that his grandson, You know, 6070 years later, wouldn’t gladly buy a house in 2019 for $500,000 100 x what he paid for the same house. I literally live in a house built in 1927. So it could have been literally the same house.
Wouldn’t he have said the same thing. That’s,
that’s crazy. And he would have not believed that person if in 1950 that said, Hey, your grandson, Jeff will gladly buy a house in 2019 for $500,000. As an important and extremely related site. Now, If you think on this idea, You’ll notice that when when people are talking about real estate specifically, People often confuse appreciation with inflation, appreciation as the actual utility value of something increasing, you know, it’s now more useful,
People wanted more, etc. So they’re willing
to pay more for it. That’s What appreciation is when somebody places more value on something
than they used to.
Inflation, on the other hand, is just simply the amount of dollars,
you have to exchange to get something going up.
And It’s funny, It’s funny, because people make this mistake.
Only, it seems to me again, real estate,
you know, it’s, it’s funny, the cost of milk is much higher than it
was 20 years ago. But you don’t really hear anybody saying
milk is appreciated,
you know, they would say the cost of the bell curve is
you know, inflation is affecting the price of milk,
I wouldn’t say milk is appreciate.
However, back to the big point,
Tomorrow’s dollars, dollars in the future will be less valuable than today’s dollars. And when you’re a borrower that’s a very powerful force in your favor.
That’s where we get into why
this is a real estate topic and why it’s a thoughtful
real estate entrepreneurs thing to think about.
Now with real estate, when you buy a property with a mortgage, You are taking on debt, right and that debt
is denominated in today’s
But when is it that you pay that mortgage and pay it off?
Well, it depends on the mortgage, of course. But let’s just take the most standard basic mortgages or a 30 year fixed amortized loan,
You start paying today, you pay a little tomorrow, the next day, the next day, the next day, and you might finish paying it off in say 30 years. So to state that difference.
When you buy a property with a mortgage,
in debt in today’s dollars denominated
in today’s dollars,
but you pay it off with tomorrow installers and tomorrow’s dollars are worth less than today’s dollars, as we’ve just discussed.
So if I can pay off
my loan, with dollars that are less valuable, Instead of using the ones that I have that are more valuable, I will gladly do that.
any day of the week. You see because both debt and the asset that the debt is associated
with, right the property
and the loan. Both the debt and the asset are subject to inflation. But the debt and the asset are two different things. And inflation affects the two different things differently almost kind of in the opposite way. So let’s just take a look at what is inflation due
For the asset itself the property, Inflation makes it cost more, right. This is what people are calling appreciation, but it’s very much inflation.
You buy your house for $250,000 and 10 years later, you sell it for $325,000
without any real change to the property itself. That is the effect of inflation on the asset. Okay. How about the debt itself for debt, Inflation makes the debt feel like less you remember my grandpa, you know, he was freaking out about his 40 $250 mortgage back
when he got it. But by 1980, let’s say when he was ready to pay it off, It seemed like
a very small loan to him. And I’m not talking about him having paid the balance down. And now the balance was small, I mean,
literally 40 to 50 in his 1980 eyes and perspective
was nothing compared to what 40 to 50 felt like
it is 1950
eyes and perspective. So What
this means is that your property continues to appreciate a
quote, I’m using air quotes, there continues to appreciate or inflate,
and it goes up in value over time, it goes up in
dollar denominations over time.
Well, the debt
continues to feel less and less ominous, because relatively, It feels like an increasingly small number.
And again, we’re not talking about
it becoming an increasingly small number, because you’re paying the balance down, that’s a separate function all by itself.
I just mean
that the balance of that that original loan
in the future is going to seem like a much smaller
number than it did when you signed up for it in the first place.
And Well, we can’t
guarantee that the dollar will
continue to continue its
its path of
inflation or in that case, as
it relates to the dollar. It’s really depreciation on the dollar devaluation of the dollar.
For the last hundred plus years. That’s really what it has done. And It took me a long time to really fully understand this principle and how it applied in my own business. And I want to credit, a podcast called the real estate guys radio, and then events that they do. And I’ve attended some of those events. It’s a great educational, no fluff, no BS type of
educational company and organization and a
few great people who run it.
And I want to credit them with giving me shedding light
on this phenomenon for me. And I went back, and I found
a specific passage
on their website that I wanted to just read to you. If the dollar is doomed to continue its 100 plus year decline, Then debt and real assets are your best friend.
Debt lets you pull future dollars into the present,
where you can use them at today’s purchasing power,
which is stronger than the futures to acquire
of real value. And then a few lines later, it says
over time as the dollar falls, the dollar price of the property rises Well, the dead stays fixed. So Here’s the benefit to you as the owner of long term rental property. And that’s why I call this the most amazing part of owning rental properties.
And nobody talks about is that when you own long term rental property,
And you have long term debt, and that goes with that long term rental property, you’ve got something really
exciting that’s happening. It’s probably happening in a way you can’t really see but it’s happening. You know, everybody knows,
and everybody talks about the magic of having your tenants pay off your loan for you. And that’s awesome. We all know that we all understand that. It is indeed a fantastic force in your favor, Because the tenants are building the wealth for you. But when you understand how the effects of inflation are impacting your debt, you realize that you also are getting the magic of being able to lock in debt in today’s dollars and pay it off in tomorrow’s dollars, which is like letting the macro economic forces Build your wealth
for you. So Now you’ve got tenants building your wealth for you.
You’ve got macro economic forces, building your wealth for you, as well. So As always, you know, we like to be thoughtful. And I hope this helps you to be thoughtful
about how you see the role of long term deals in your
business in your world and your life and your portfolio
versus short term deals. Because each plays a very different role with very different purposes. But the long term deals might now hopefully from this podcast episode, have a different role in your mind venue even thought before. And the role of debt
financing in this long term deals is something for you to be very, very thoughtfully
thoughtful about. Most importantly, I hope that you can see all of these forces at work, and that you can choose
thoughtfully and with intent for you
to do what
you think is right for your portfolio. I can tell you for myself,
I intentionally acquire
debt, I acquire debt that is low interest, flexible, and most importantly, long term. And I secure it with long term real assets, real properties that you can go and touch tangible with real utility like rope
roofs, and they keep people dry and warm and safe and things like that. But I quite debt.
That’s not only low interest and flexible, but it’s long term.
And so in doing so I not
only let the tenants pay those loans off for me, but I let the macro economic forces of inflation take the sting out of that debt for me as well.
Thank you for listening to Sleaze-Free Real Estate Investing and on the next episode, we’re going to be discussing what financial independence means to a thoughtful real estate entrepreneur. Please Do yourself a big favor, please do us a big favor by hitting the subscribe button in your podcast app. Also, please take a moment to rate and review the show on iTunes. It just really helps other people to find us and give us an honest rating. If you like what you’re hearing rated accordingly. If you’re if you don’t rate it accordingly.
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Reminder, today’s show notes including a transcript and thoughtfulre.com/E18. Until next time, this is Jeff from the real estate entrepreneur.