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Congress’s $40B Sucker Punch to Real Estate Investors

Inflation is big, scary, and in the news. With it comes the fear of sky-high home values, consumer goods falling in short supply, and cash positions becoming worthless overnight. With high inflation at our doorstep, we need to be smarter (and faster) when it comes to investing. Thankfully, for BiggerPockets listeners, one of the strongest hedges against inflation is real estate!

David Green and Dave Meyer are back on another episode of BiggerNews to discuss not only the cause of inflation but how to protect yourself against it in this hyperinflationary environment we find ourselves in. Both David and Dave harp on how important it is to start investing as soon as you can, taking advantage of low-interest rates and locked-in leverage that bank financing provides.

Jeff Watson, attorney and self-directed IRA expert, joins the Dave duo to talk about the proposed “Build Back Better Bill” and its consequences for real estate investors. Make no mistake, this is NOT a bill that will pass without affecting you. This bill could be a nightmare scenario for investors, and Jeff explains exactly how you can fight it.

David:
This is the BiggerPockets Podcast, show 526.

Jeff:
It’s a mess if this happens. This is an absolute, complete train wreck coming down the road and I can’t explain any logical reason behind it, because if you want to prevent the next Peter Thiel, you already put a provision in there, did that, it said you can only have $10 million in your retirement accounts. We stopped it right there. Bang. Done.

Speaker 2:
You’re listening to BiggerPockets Radio, simplifying real estate for investors, large and small. If you’re here looking to learn about real estate investing without all the hype, you’re in the right place. Stay tuned and be sure to join the millions of others who have benefited from biggerpockets.com. Your home for real estate investing online.

David:
What’s going on, everyone. It is David Greene, your host of the bigger pockets podcast here today with my co-host, Dave Meyer. This is the podcast where we teach you how to build wealth through owning real estate. We do that by interviewing top performers, expert investors, and just plain regular people who lay out the tactics and mindset that will help you find financial freedom if you make the consistent choice to keep taking smart action.

Dave:
That is absolutely right. If you’re new here, BiggerPockets actually has four podcasts focusing on everything from your first deal to financial freedom. So, be sure to check out all the BiggerPockets podcasts in whatever app you use to listen to podcasts. We would, of course love it, if you leave a review. That is how we improve, how we get better and find out what content information is most relevant to all of you.

David:
Great point. And now for today’s quick tip, today’s quick tip is I’ve successfully renegotiated the contract with BiggerPockets that I no longer have to say this high pitched quick tip anymore.

Dave:
Congratulations.

David:
Just kidding.

Dave:
And that was a big …

David:
That was never-

Dave:
That was a big sticking point for you.

David:
Go ahead. Yeah, that was huge. Really that’s all I needed, was no green M&M’S in my bowl, and I don’t want a high-pitch quick tip. Was never a big fan of that. I wanted to say it like Batman. I wanted to come in and say quick tip.

Dave:
You’re such a diva, man. You got-

David:
But Brandon couldn’t get his voice.

Dave:
Brandon couldn’t make his voice low enough.

David:
He didn’t have enough testosterone to get that low, so we were always stuck in that soprano episode, but good news is we won’t be doing quick tips in that format anymore. I wanted to let everybody know this is our farewell to the quick tip and several new, beautiful doors will be opening to take its place. All right, before we jump into today’s show, I want to make sure that everyone sticks around to the end where Dave and I have a great conversation about ways that real estate helps to hedge against inflation. Dave, anything you want to add to that?

Dave:
No, I think that right now there’s a lot of news about inflation and there’s a lot of fear out there about getting into the housing market. David and I really get into it, get passionate about it, honestly, about different ways that you can use real estate to protect yourself against the risk of inflation, which is honestly higher than it has been in about a decade. Definitely stick around for that. You’re going to want to hear what David and I have to say on that topic.

David:
Yeah. Today’s show is really good. We actually get into the topic of inflation. We talk about some stuff going on in the news, and then we’re going to have an interview with a very smart man who is heading to Capitol Hill very soon to go try to prevent some laws from being passed that are going to hurt real estate investors. So, we’ll be talking to Jeff Watson. He’s got some really good insight on what’s hidden in the Build Back Better bill that will hurt real estate investors. Then Dave Meyer here also gives some really good data, and so what we see happening in the country as a whole. So, if you want to stay abreast of what’s going on in the market today, you have no better place to be than right here.
All right, Mr. Dave Meyer, the Amsterdam man, or the man from Amsterdam, how’s it going?

Dave:
It’s going great, man. How have you been?

David:
I’m pretty good. California had just, at least in the Bay Area, this massive storm that came out of nowhere. So, I flew in from Southern California. I was doing a meetup down there where we were talking about the velocity of money, basically a presentation on how inflation is sort of ripping through the country and why buying assets at a time like this is just extra, extra important, and so I flew home. I had to drive about 35 miles an hour, the whole way to my house, because it was just like a torrential downpour.

Dave:
That sounds like every day of my existence in Amsterdam. People think Seattle, it rains a lot. It rains 212 days a year on average here, which is like way more than Seattle. I feel your pain, but I think California needs all that water. Don’t you?

David:
Yeah. That’s the thing is you kind of have to just take it because we get rain once every four years and [crosstalk 00:04:39] pretty bad.

Dave:
So, every once in a while you have to drive slowly, but well worth it for the water. Nice. That sounds fun. How did the workshop go that you did?

David:
That was actually really cool. I think we’re going to start doing like a weekend conference instead of just a meetup, where we’ll have different investors come in and I’ll have different spots, like Southern California, there’s a lot of investors that are there. We’ll do them there, but I’m thinking about doing them at different parts of the country. BP Con was awesome. Everybody comes back from that and they’re thrilled, but you don’t want to have to wait for once a year before you can just get together with other people and hang out and meet other investors and see what’s going on.
I’m probably going to look to put together more events like that. Partially that’s because the BiggerPockets audience is just so cool. I always say like, there’s hardly any buttheads when you go to a BiggerPockets conference. Everyone is just in a good mood and they’re a good person. It’s not like the other conferences where it’s sort of like an egomaniac match where people are trying to talk each other down for how many doors they have. Not every real estate conference is as good as the BiggerPockets one.

Dave:
No. Yeah, I mean, I’m glad to hear that, because I haven’t been to too many real estate conferences outside of the BP ones, and I always think that it’s awesome, but glad to hear that maybe I can skip a bunch of the other ones and just stick to the BiggerPockets con ones.

David:
Yeah, man. There’s a bunch switch a pinky razors at the other ones. My pinky’s raised on my glass as I talk about things.

Dave:
No. We just people who are eager to learn, meet each other, have a good time, and BB con was just like that. You said that in this workshop that you were doing or the meetup, you guys were talking about inflation, right? I think that’s what we want to talk a little bit about today because that is really, it seems like it’s on everyone’s mind right now, and with good reason. It’s sort of rearing its head in a way that it hasn’t in at least a decade or so. Can we just jump into that?

David:
I think that’s a great idea. This is all I’m seeing in the news, it’s all everybody’s talking about, it’s all the questions I’m getting, so this is probably the most relevant topic we could discuss.

Dave:
Okay, good. Let’s just start with the basics. Can you just fill everyone in about what inflation is in the first place?

David:
The first thing I’ll say is that if you go back to the BiggerPockets Podcast that we were making when COVID was first a thing, right around the shelter-in-place time, all that we heard was the sky is falling, the economy’s going into a depression. Hoard your cash, amazing deals are coming. I’m not trying to toot my own horn, but I was one of the only people at the time that was saying, I don’t think that’s going to happen. I think the government is going to print more money to get us out of this thing.
I think that’s going to actually make everything more expensive. So, me and the clients I was representing, I was advising them, you should take advantage of everyone else being afraid to jump in and buy more because I think it’s going to get a lot worse. There was literally some like hate mail that came in, like how dare David say that we’re not heading into a depression. People are going to lose money. So far, in retrospect, I looked like I was right, and the people who listened to me have done very, very well.
Now I’m saying the same thing, because I think it’s going to get worse. I think that the sense of urgency people needs to have needs to go higher. Inflation, put simply, is when the cost of goods and services increases, and it’s typically tied to the fact that governments can create their own currency. So, as they create more currency, that currency becomes worth less money. You have to spend more of it to get the same thing that it used to buy you.

Dave:
Yeah, absolutely. It basically means that your money is worth less. One of the ways I like to just visualize it is like, if you have the same amount of money, you can buy less of some goods or services that you like. I was explaining this the other day. On my Instagram, and if you don’t know, David, I’m obsessed with sandwiches. It’s like my favorite thing. I was trying to explain inflation to someone, and I was saying to think of like a club sandwich, right? You got like four little pieces of it. Maybe that costs nine bucks.
Then after inflation, it goes up to maybe $12, and all of a sudden, next time you go to the deli, you can only afford three little triangles of your club sandwich instead of four. That’s why everyone just hates inflation. It basically means the value of the money that you have in your bank account and your wallet or in your investments can no longer buy as much stuff. So, when inflation starts to hit investors and all sorts of people start to freak out because all of their hard-earned money is now worth less to them, and you basically have to work harder to be able to maintain your own money.
You talked a little bit about printing money, and that being one of the major causes of inflation, and that definitely is. Just so everyone knows, when you add more monetary supply into a system, it tends to increase inflation. Not always, but it definitely tends to do that. Are there any other things that are going on that are causing inflation right now?

David:
Yeah. Even more impactful than printing money is actually the shortage of supply. I heard Morgan Housel talking about this. He came to a GoBundance event. He wrote The Psychology of Money, really good book. He mentioned how, basically exactly what I said, printing more currency makes it less valuable that does add to inflation. But what really ramps it up is when there’s a shortage of a thing. So, he talked about the tulips in Holland and how the whole reason that, that, funny story, if you guys ever want it, just Google tulips in Holland. That’s why Dave moved there actually so he could study this in more detail. Prevent the next tulip debacle.

Dave:
[crosstalk 00:10:10] inflation case study over here are the tulips since in 1890, or whatever it was.

David:
That’s exactly right. So, people got afraid there weren’t going to be enough tulips, and the word got around, and so everyone started hoarding them. Really, it’s kind of the modern, or the old version of no toilet paper during COVID, same thing happened, right? When people believe there’s going to be a shortage of a certain asset, they’re going to buy as much of it as they can. Now, if you take the fear of not having enough of something and compound it with the fact that everybody has more money than they normally would have because of inflation.
What’s worse, we can talk about this later, it makes you feel like you’re wealthier than you really are. That’s even more dangerous about inflation is, and that’s one of the reasons I talk about it so much is it’s carbon monoxide. You don’t see that it’s a problem until it’s too late and it hits you really, really hard. So, there’s a housing shortage and everybody wants them, and there is a shortage of places where you can, and this isn’t an actual supply thing, but the concept, there’s a shortage of places where you could invest your money and get a good return.
The fed has kept interest rates incredibly low. And if you used to put your money in a CD in the bank, I mean, have you ever … Dave in your experience, have you heard people talk about certificates of deposit in the last five or six years?

Dave:
No, not at all. I think it was like something back when I was like in high school and my grandpa told me to put my $50 in this is certificate of deposit. I mean, they earn what? A half a percent of interest now, if even that much. It’s like other asset classes, traditionally safe asset classes like bonds or CDs are offering returns that are lower than inflation. Yes, you won’t lose as much money as if you’re holding cash, but you’re still probably losing two or 3% of your money every year, or at least, if inflation stays at this rate, you would lose two or 3% of your money just by putting into a CD. That’s not the type of investment I’m looking for.

David:
Yeah. You don’t even hear the phrase CD mentioned anymore. It’s not even an option. Imagine that inflation was the enemy and it was coming for your money, and you had all these hiding places where you could hide. You had CDs, you had bonds, you had stocks, you had real estate, you had invested in other people’s real estate, you had IRAs, you had retirement accounts, all of these options. As interest rates get pushed lower and lower and lower, hiding spots start getting taken away. You just can’t put your money in a CD. You’re going to get caught. The inflation is going to find you, it’s going to take your money.
So, more and more people are pushing into the real estate space because that is an area that traditionally, nobody, I shouldn’t say nobody, less people wanted to deal with it because it takes more elbow grease to make money in real estate than just to stick it in a CD and never think about it. The headache factor kept a lot of people away, but when you’re running out of hiding spaces and inflation is coming for you, you’re willing to take some of that on.
Add in things like technology that’s increased. It’s made real estate investing easier to systemize. Companies like BiggerPockets that have increased that have made the education aspect that you need to do it safely, much easier to find. And you’re getting this rush into real estate that other investors are getting into that people that were never investors are getting into, that people that just made a bunch of money from their tech company going IPO is going, now, they’re going to put their money into it.
And institutional money, the big players, they’re all rushing into one of the few hiding spaces that we have left. That is creating a shortage of assets you can actually buy, that when you compound it with all the money that the America is creating is making this huge, huge surge in real estate prices.

Dave:
I love this analogy that you’re using about hiding places for your money for inflation, because I think that’s a super important thing that people think that they can wait out inflation or that you can wait for the market to crash or do something like that. But your money’s sitting in your bank account right now. The most recent data is that inflation went up about 5.2% year over year. I think that was in August. You’re basically, if you had $100,000 in the savings account, you just lost five grand just by keeping it there. You can’t wait out inflation.
I think that’s what creates the sense of urgency for people and why we want to talk about this today. I do want to also just talk about why real estate investing is such a good hedge against inflation, maybe the best hiding hole of all, and I’m biased, but I think, generally accepted by most economists investors, real estate is always seen as a good hedge against inflation. But I also just wanted to add just something about inflation I think is important, and it’s that some level of inflation is normal and is to be expected.
Normally, the federal reserve targets about 2% inflation, and it’s been under 2% for a lot of years, but I think the important thing to know is that the government wants a little bit of inflation, because that fear, that risk that prices are going to go up is what keeps the economy moving in normal times. Because if you think prices are going to go down, or if you’re going to stay flat, businesses are less likely to invest. People are less likely to invest. So, you need a little bit of inflation. You don’t want a lot because obviously what we’re talking about, all these declines, but you need a little bit.
2% is generally what the federal reserve targets, but right now, we are seeing 5%. So, that is significantly more than what the federal government wants to see and there’s a lot of debate about what … Is it transitory? You’ve probably heard that saying right now, transitory inflation. That means like, is it just temporary and is it going to go away, or is this going to be around for the long-term? But I see wisdom on both sides of this argument, but I think the fact of the matter is David, tell me if you disagree, is that the risk of inflation, whether it comes or not, but the risk right now is higher than it’s ever been in my investing career, at least over the last 10, 15 years since the great recession, right?

David:
I think if someone just Googles US monetary supply, and they take a look at how much money has been put into circulation since the time the country was created, it was roughly, almost very close to looking like it was the same from when we declared independence, all the way up to 1971 when Nixon split the dollar from being tied to gold, and then it started to increase. Then, in 2008, we started quantitative easing and it exploded, and now we just see more and more of these explosions that the government is throwing at it.
There is almost, in my head at least, no way we won’t have inflation. It’s impossible with as much money as being thrown out there. At the BiggerPockets conference, we actually had an expert come in to speak about this, Brian Beaulieu, and we’ve got a clip of him, Dave, if you want to tee that up for us. I think this would be a good way for the audience to understand how we, as real estate investors, are looking at the, the landscape of inflation that’s coming.

Dave:
Yeah. So Brian Beaulieu, who’s from ITR Economics came and gave one of the keynote speeches at BP Con, he’s fantastic. And he does talk a lot about inflation. I believe that what his opinion is that current inflation right now is transitory and is likely not to stay at this high rate, but he believes that inflation, over the next five years, is going to take off, but we haven’t even hit that inflection point for the long-term, what is known as systemic inflation, to start coming in.
There’s all sorts of implications for this. And after we play the clip, we’re going to talk all about what real estate investors should be doing, and Brian hits on that, but let’s let Brian explain it in his own words.

Brian:
I mean, in 2026, including our economy, but let me answer another question for you right upfront. That potential recession out there in 2026 is not a reason for you to hold off buying property today. Look, those interest rates are going to be higher out there in 2025. When prices correct somewhat, they’re not coming all the way back down to where they are today. I know prices have gone up considerably today. I get that, but they’re not going to come back down to where we are today, even with a soft spot in the economy in 2026.
Do not take any worries about a recession as a reason to sit on your hands. You’re being gifted a period of very, very low interest rates right before inflation hits, and you folks are savvy enough to know to buy the right pieces of real estate. This is the brass ring time in this industry. Go for it.

Dave:
Okay. Thank you, Brian. That was super helpful for us. David, what do you take away from this clip from Brian Beaulieu?

David:
The first thing is a point he makes that I make all the time, and I’m so glad to hear someone else, who’s even smarter than me, saying it. The problem is when people try to time the market. It’s different than playing different markets. I am a fan of playing the market, so I will move to different parts of the country based on what I see with demographics. I will follow what’s happening in trends with what type of companies are starting in places, and I will play the market, but I don’t say I’m going to oversimplify this and I’m just going to treat it like buy low, sell high. That is what got people in trouble.
If you’re one of those investors that’s saying, this is really competitive, to get a home prices are high. I’m going to wait for prices to drop. There will come a point when prices drop. Everyone knows that. This is what makes this such a tempting model to try to follow. But Brian made a great point. If let’s say your average house is a hundred right now, and you’re waiting for a 30% drop, that’s a big, big hit. You’re going to buy it for 70. By the time you have that 30% drop, prices might have gone to 200.
So, they’re dropping down to like 140, which is still higher than the 100 that you could buy it for right now, and that’s the danger with trying to time the market. By the time that the market does drop, we’ve had so much inflation and prices have gone up so much that you’re still paying more than you would have paid if you bought now. You’re losing what? Five, 10, maybe 15 years out of paying down that loan and getting the amortization schedule on your side. You’re losing out on rent increases that you would have had. You’re losing out on the knowledge and the resources and the information that you would have gained from being an investor for five to 10 years and buy more properties in better areas.
You’re basically just losing on everything as you put all your eggs in the basket of I’m trying to time the market.

Dave:
Totally. How often do people who are professional forecasters get wrong timing the market. Pretty much every single time, no one can do it. I spend a lot of time looking at the housing market and I don’t even try and do it. I just think it’s crazy to me that people are willing to sit on the sidelines now because they say there’s risk, and there is risk. There’s always risk in every single investment, but there is risk right now, because of inflation, there is risk in doing nothing. It’s not even a risk. It’s a guarantee, as long as there is inflation, you are losing money.
To maintain your wealth right now, you have to be investing your money. Right now, it’s at 5%. So, you have to make a 5% return just to maintain your actual amount of wealth in real dollars. But so many people are saying their fear that they’re at an all-time high, which you and I have talked about a lot. Personally, I don’t think either of us think we’re at the all-time high yet, but just think about what you are missing out on by not getting into the market and the risks to your net worth that are coming from inflation right now.

David:
That is the key that I think people need to hear is that you are going to lose your money if you do nothing. It’s not about making money by making moves. It’s about keeping what you already have. You have to make moves. If you hear sort of the emotion in our voice when we’re talking about it, it comes from the point that inflation is like carbon monoxide. It is poisoning your wealth right now and you don’t see it. So, there’s many people, I think, that hear this and say, well, Dave is a real estate agent. Of course, he’s going to tell people to go buy houses or, well, these are BiggerPockets, of course, they’re going to tell people to buy houses.
There is an argument out there that would say, I don’t buy this. I’m going to wait for prices to come down. If we were not in an environment of inflation, let’s say it was the opposite, let’s say prices were decreasing by 5% every year, and your money was getting stronger by 5% every single year. My advice would be flipped around. I would be telling people don’t borrow as much money. Owing debt when prices are dropping is very bad. You’re paying that debt back with more expensive dollars, not cheaper dollars.
I would be saying, save your money and invest it in something you can get it back out later. The advice that we’ve given would literally be the opposite. Run the ball instead of throw the ball, if the rules of football changed to where it was very difficult to throw the ball, but that is not what we’re seeing, and that’s why the Dave Ramsey style advice isn’t amazing in an environment like this, where typically that’s very sound counsel, don’t borrow money. In an inflationary environment, you start losing if you’re not borrowing money, and I’m not saying this is good. I don’t think this is good.
I think that this is the wrong way to get ourselves out of the financial missteps the country;s made, but it is happening. So, if you have money in the bank and you’re not investing it, every single day, that money is becoming worth less. You are losing every day. You don’t invest anything. Now, add into that, every day that you don’t buy something or invest it, that thing is becoming more expensive. You’re going to have to borrow more money and put more down when you eventually do go buy it and the dollars you’re putting into it are going to be worth less.
Rent increases, we should see continuing to climb and climb and climb, as there’s not enough assets for the people that need them, and the price of everything is going up. You’re jumping in late and getting less rent increases, and you’re locking in a payment that is higher if you do it in the future than it is right now. What I’m getting at here is you’re losing in multiple angles. Not just one, if you’re waiting, because like you said, you cannot outwait inflation.

Dave:
Yeah. That’s really well said. You talked a bit about debt and about taking out money to finance these purchases. I know there are people out there who are against debt, but just for historical context, mortgages right now are pretty much as low as they have ever gone and are never likely go lower than they have. I mean, the indicators that you use to project mortgages, which are 10 year treasuries and the Fed’s target rate are pretty much as low as they’ve ever been. So, mortgages are super low right now.
In an inflationary environment, being able to lock in that mortgage at a super low rate, pays huge dividends over the long-run. Because for most investors, if you are leveraging using a loan to buy a house, your mortgage is going to be your single greatest expense. When you go and sign that debt, you are locking in that payment for 30 years sometimes. Then, as prices increase, you can increase rent. Your home price is going to increase. So, you are actually able to have dynamic cashflow. You are able to adjust to the times. You are able to adjust to the inflation, but that mortgage company, they can’t raise your rate just because there’s inflation.
They have taken on the risk of locking in that rate for 30 years and you are the beneficiary of that. While debt should be managed and used in a logical and a responsible way, I think what David and I are both saying is, now is a logical and responsible time to use debt to lock in real estate before it starts to go up. I mean, I feel like a lot of times economists beat around the bush and they’re not as direct. And what Brian Beaulieu said in the BB Con, without beating around the bush, was basically like, go buy as much real estate as you possibly can right now and leverage it. Right?

David:
Yeah. And he also pointed out that the consumer price index, that’s the CPI that is traditionally the way that the government monitors inflation. They take accumulation of different like goods, household items, food, stuff like that, and they monitor the price of it, and that’s how they tell what’s happening with inflation. Brian did mention he doesn’t know that, that is necessarily running rampant right now. I think all of us can say, just looking at what things cost and grocery stores, looking at the price of gas, there is some inflation going on.
But that isn’t what Dave and I are talking about right now. There’s a difference between the goods that you need to live off of, the eggs you’re going to buy to eat that day inflation, and asset-based inflation. Rich people could only eat so many eggs. They can eat the same eggs as you and I. If somebody has a net worth of $200 billion, they’re not going to go buy more eggs or more milk than somebody else would. They do need to go buy more real estate than somebody else would. It’s one of the ways that they can actually shelter themselves from taxes and that they can manage that money and make sure it’s growing, or they’re not losing it with relatively less work than, so if they like try to build a complete business off the ground.
There is a asset-based inflation problem because there’s not enough of those things. If you’re one of those people that’s looking at the CPI, and you’re like, this doesn’t look that bad. I don’t feel a sense of urgency. Real estate is not covered in that. This is a completely different … The hiding places where people can put their money are slowly being taken away and we’re all running for the same ones. At a certain point, you’re left without the hiding place, and that’s when the big mean scary monster of inflation is going to catch you.

Dave:
Yeah, that’s a really good point, because I think it is important to pay attention to both things. Because the CPI, which as David explained, is the sort of the government’s way of tracking it. That 5% is actually discounting the value of your dollars. But I think what David’s saying is that the assets that can help you pull yourself out of this inflation too, they are getting expensive at an even faster rate at 5% a year. I mean, we all know the housing market has gone up 16% to 20% in the last year. Those things that can help you hide from inflation are getting more and more expensive and are going to be less and less attainable to small and medium sized real estate investors as all these hedge funds or wealthy Individuals are also looking for places to hide their money.
And they are just pushing money into a multitude of asset classes. There’s a reason you’re seeing the stock market up so high right now, but I think a lot of people are … That’s losing steam a little bit right now and we’re going to just see real estate continue to go up over the next couple of months, or years even.

David:
Yes, that’s exactly right. And those big companies have more resources, they have people that they pay a full-time salary to do nothing but study this stuff and go after those properties. Well, we have some weekend warrior mentality. I’m going to go driving for dollars and find a property with high grass. They’re out there all day long, constantly hitting up the wholesalers before they ever come to you, paying more money than you would pay, having resources you don’t have to beat you at that game.
One of the ways that your average blue collar investor has been able to get ahead, and advantage they’ve had, is by investing money that they have not been taxed on that they’ve kept in a self-directed IRA. They’ve been able to take their money that they put aside from their job, or from whatever way they made it, and invest that into real estate, and so they have more dollars they can invest. If you were paying 30% in taxes, instead of investing 70 bucks, you can invest $100 dollars, and so you can get more real estate.
There’s now talk in the new presidential administration’s Build Back Better plan of eliminating the investor’s ability to do that with their 401k. In addition to all this inflation talk that we think is very relevant, very important, and people should be aware of, we also have an expert that you and I are going to interview pretty soon here, Jeff Watson, who’s going to explain exactly what’s in that bill, how it affects real estate investors and what we need to know about.

Dave:
Yeah. I mean, Jeff is going to drop some knowledge on everyone about IRAs. This is a subject I honestly didn’t know as much about as I probably should have because I don’t invest out of an IRA yet, but this is a huge deal about how much money is flowing into and out of the housing market. Because if you start to see a reduction in the amount of capital flowing into the market, you could see housing prices negatively impact, but we’ll teach you all a bit more about that as we go into the second segment of our show in just a little bit.

David:
Jeff Watson, thank you very much for joining us on the BiggerPockets podcast, how are you today?

Jeff:
I’m doing great. It’s a privilege to be here, David. Thank you.

David:
Well, the privilege is ours. We’re really glad to have you because we want to discuss something that we think will have a very big impact on real estate investors, but it’s a pretty complicated and fairly nuanced topic that I didn’t want to have to tackle myself. I’m sure Dave Meyer didn’t either. Luckily we have an expert in the house. Why don’t we just turn over the reins to you and you can kind of describe what the topic is that’s concerning us and what you know about it.

Jeff:
Well, for about the last five, six weeks, my life has been consumed by provisions that are in the Build Back Better bill currently pending before congress, and there are two sections that are enormously detrimental to the self-directed IRA industry and self-directed investors, as well as anyone that relies upon liquidity or capital coming from anybody’s self-directed IRA.

David:
Yeah, break that down for us. What’s the Build Back Better planning in case anyone hasn’t heard of that.

Jeff:
Sure. I gave you a high level, and I’ll be happy to break it down. Let’s do a little bit of background. First of all, I’m an attorney licensed to practice law in the State of Ohio. I’ve been practicing for a little over 30 years. I’ve also been privileged, over the last four years, to serve on the board of directors of Quest Trust Company. One of about 42 different self-directed IRA custodians or administrators. We’re one of the mid-tier companies. We’re not the biggest and we’re definitely not the smallest, but we do have an amazing education program.
We’re headquartered in Houston, Texas. We’ve known for a while that there was an element within the internal revenue service that just didn’t like our investors using self-directed IRAs. We saw the handwriting really come out with some of these articles, particularly in ProPublica, just talking about how one man, Peter Thiel took $2,000 and turned it into 5 billion, with a B, in his IRA. They publish that story using leaked confidential tax information in order to start ginning up some emotional support for how we’re going to get after the rich who are abusing the system.
Now they’ve got a bill out there that has coalesced, and it’s part of this massive reconciliation bill that probably everybody’s heard about it in the United States, because there’s a lot of controversy in Washington, D.C. right now about how big the bill is going to be, what’s going to be in it, what’s not going to be in it. Well, the House Ways and Means Committee passed an 881 page section of the bill. The whole bill is about 3000 pages long, but in this 881 pages come from the House Ways and Means, at about page 693, there’s a Section 138-12 and then Section 138314 that are enormously problematic to the self-directed IRA industry.
I can go into it a little bit more, but if you’ve got some background questions, if I’ve skipped over something, hit me with it and I’ll just kind of fill what I missed. I can ramble for an hour if you guys let me.

Dave:
Yeah. Jeff, thank you for filling us in. That’s super helpful. I think there’s some people, myself included, who aren’t super familiar with a self-directed IRA and what it offers real estate investors. Could you just give us a quick intro for those of us who don’t know too much about it?

Jeff:
Sure. Self-directed IRAs means that the account holder can put their money to work in something that they know like and understand, which means they can do all sorts of things related to real estate. I see real estate investors buy houses with their self-directed IRA, hold them as rentals. I see them pay contractors to run the rehab and flip them and the profits go in their IRA. I see investors lending money to rehabbers out of their IRAs. And I also see a lot of investors taking big chunks of money, 100, 250,000, a half a million dollars out of their IRAs because they’re an accredited investor and putting that money into a PPM, a syndication, some other big, huge collection of funds to go take down a huge apartment complex, to go buy a huge note portfolio, something like that.
So, you can do small stuff or you can do massive stuff all in the real estate space with a self-directed IRA.

Dave:
The reason people want to use a self-directed IRA versus just cash they have lying around is because it is tax advantaged, right?

Jeff:
It’s not only tax advantaged, and that’s a big reason, but sometimes it’s the biggest pile of liquidity that a lot of people have, because that’s where they’ve been saving money for two, three decades, consistently working in the corporate world, shoving money into their 401k every month, and now 20, 30 years later, Shazam, they got six, seven figures in a retirement account. They understand real estate and they want to get some diversification away from stocks, bonds, mutual funds, and ETFs, and so they’re looking to do something different.

David:
Okay. If I understand you right, imagine you’re typical W-2 worker, working a corporate job, some type of job where they have a retirement system set up, they put money in this self-directed IRA, and it’s not taxed because, as long as you keep it in there to a certain age, you won’t have to pay taxes. So, it’s a way that the government wants you to be saving money. You’re allowed to invest that money into certain things which has traditionally been stocks and bonds, stuff that everyone’s used to when we think about investing.
Peter Thiel and others have found it’s not illegal, but you are allowed to use that money to invest in real estate as well. So, what they started doing was they started taking money in that savings account that was not taxed and lending it to syndicators, lending it to flippers, buying properties themselves as long as they follow certain regulations, like you can’t take any of the cash flow that comes from the property yourself. It has to go back into your IRA, and they use this retirement account to fund real estate deals, totally legal, totally within the rules, but it irks people that you’re able to go make money with real estate using a sort of an investment vehicle, that when it was set up, the understanding was, well, you’re going to go inflate stocks.
You’re going to buy stocks and bonds. You’re going to prop up that market. Is that more or less a good summary of what we’re talking about here?

Jeff:
David, that’s a very good summary. That’s an extremely good summary. The rules, when they set these accounts up, they gave a list of saying, hey, these are the things you can’t invest in. And they were specific. You can’t invest in precious metals, collectibles artwork, things like that. The rest of it was wide open. Wide open. We’ve had people literally. I mean, when we came out of the great recession, it was individuals with IRAs and solo 401ks that were lending to rehabbers when banks wouldn’t. My clients, customers of Quest Trust, customers of these other huge companies will lend, they’ll lend where banks won’t.
They’ll be able to fund a house that’s too ugly that the bank won’t lend on and someone can then fix it up and make it a good rental or put it where a family can buy it, and now live in it, you got a pride ownership. So, you took a liability, turned it into an asset to the community, and IRA money did that in 10, 11, 12, 13. Then everybody started catching on, hey, we can do this, we can do this, the economy starts coming back, but it was IRAs that pulled us out of this thing. It was IRA money that pulled us out.

David:
For a long time, people who borrow money from others to go invest it for of them would explain and teach, you can use money in your IRA to fund the deals that I’m putting together. This was frequently something that would come up from syndicators and others when someone says, I have no money. Yeah, you do. You’ve been putting money away for 20 years in this IRA and you’re getting a small return on it because you’re just buying bonds or whatever. Invest it into real estate.

Jeff:
Invest it into something that you know. Invest it into something, because do you happen to know the CEO of all the companies that you own stocks in there? No, but you can know the guy you’re lending the money to.

David:
Yeah. Now, one of the things I’ve mentioned before, this is just a personal pet peeve of David Greene, I don’t like it when the Donald Trumps and the Robert Kiyosakis of the world get up there and say, with a slightly braggadocious attitude, I don’t pay any taxes on any of the money that I make. Real estate allows me to not pay taxes. And there’s never an explanation of, because I’m taking more risk, because I’m actually putting this money into deals where I’ve studied and I put time and effort into learning it. So, the headline becomes rich real estate investors don’t have to pay taxes, and that is obviously a poke in the eye to people that are not real estate investors, and it, what’s the word?
Dredges up all of this animosity and anger where someone goes to a politician and says, “They can’t get away with this anymore, they’re not paying taxes.” When things like this hit the news, I’m always like, ooh, can we just stop talking about it? Because it’s misleading and it’s going to give everyone this impression that real estate is some secret loophole where you don’t have to pay taxes. Okay. From that point, do you mind jumping in and catching us up to speed with what you’re seeing in the legislation now?

Jeff:
Before I do that, I’m just going to say, amen, preach it, David. Preach it. I love that. Yes. All right. For the people that have stayed so far and you’re like, okay man, Jeff, let’s get to the specifics. There are two sections in this bill, in the Build Back Better bill, that are hugely detrimental to self-directed IRA account holders, and we’re fighting tooth and nail on those two sections, and I’ve got multiple meetings two days from now in Washington, D.C. on it.
We’ve got a huge email and letter writing campaign and phone and fax campaign going on it. The first section is section 138312. I’m going to say that again so you guys can write it down if you want to. It’ll be in the show notes and so on, folks. Section 138312. This is the section that says that an IRA can no longer invest in anything based upon the credibility or status of the account holder, which means, if you used to be able to put your IRA into deals because you were an accredited investor or you were a sophisticated investor, or you had a high income, or you had a professional licensure.
So, therefore, you were eligible to participate in these deals, this particular code section says, your IRA can no longer do this, and oh, by the way, if you have already done it, we’re going to give you 24 months to get your money out of the deals that you’ve put it into. Let me explain the significance of that.

Dave:
Just so-

Jeff:
Yeah, go ahead. Go ahead, Dave.

Dave:
I just want to make sure that I understand. So, you’re saying that if you are had the status to be able to invest in syndications, you cannot invest using your IRA anymore?

Jeff:
That’s what they want to make … That’s the purpose of that proposed code section, is to say, accredited investors, sophisticated investors, you can no longer use IRA dollars to do this. You got to use taxable money only.

Dave:
What’s the logic behind that? What’s the logic behind that?

Jeff:
Dave, I wish I knew.

David:
Well, really quick, Jeff, before you explain the logic, can you define very quickly what a sophisticated and what an accredited investor are?

Jeff:
Sure. An accredited investor is someone who generally has a net worth of a million dollars or more, or has an income of a quarter of million, 300,000 or higher. A sophisticated investor is someone who has a high income, doesn’t necessarily have the high net worth. And folks, I’m not getting the rules precisely, and so don’t hold me to these rules precisely, but it’s basically people who have high net worth, good intelligence, investing experience, are in the high income. That’s pretty much what it means.

David:
The idea behind why we have designations is because syndications and other investment vehicles like that are not regulated by the Securities and Exchange Commission. The thought was, if you have a high net worth, if you’re good at making money, we can trust you to make decisions on your own. For all the people who are not financially savvy, you can only invest in vehicles that were monitoring through the CC. Is that more or less accurate?

Jeff:
Very accurate. It is the accredited guys, the sophisticated folks. You’re allowed to go take riskier, unregulated investment risks. If you don’t have that status, then we don’t want you to be irreparably financially harmed by taking a risky investment. You got to stay over in the mutual fund space. You gotta stay over with the stock broker that cold calls you and so on. You know what I mean? Yeah. I think you and I both understand the risk of that.
But here’s the part that really is punishing to our real estate environment and economy right now. If section 138312 becomes law, everybody who’s an accreditor sophisticated investor and has put IRA money into a syndication, into a PPM, into any kind of fund, you have only got 24 months to get that money back out. Now, I don’t know about you, but when these guys are raising this capital, they know that they can take in one out of every $4 to be an IRA dollar. Now, how many apartment operators do you know that have got this money lined up and are taking down their deals and they’re still in the process of rebranding and restructure and renovating and then they’re going to refinance in 18 more months.
How many of them do you think can afford to have one out of four other people with money call them up and say, “I need my money back now.”

David:
Yeah. And not many deals are put together.

Jeff:
I mean, you want to talk about sucking liquidity outta the market.

David:
You don’t put a deal together on a two year timeframe, hardly ever. That’s a very rare thing. Most of the deals I see are typically a five year timeframe, and it could be extended.

Jeff:
Five to seven years. Yes.

Dave:
So, if this passes, then there’s basically going to be a whole bunch of investors who were legally investing using their IRA, who are in syndication deals, for example, that have a five to seven year timeline, but they need to get liquidity now. What happens there? Are we going to see a bunch to multifamily apartments trying to go up on the market or what you think happens from here, Jeff?

Jeff:
I think we’re going to see two things. I think we’re going to see a bunch of people panicking and trying to get their money out quick. I think we’re going to see operators try to refi, and they’re not gonna be able to refi because the banks are gonna figure out real quickly what happened. And they’re gonna be like, ah, no, not so fast. Because when money’s leaving the marketplace, lenders do one thing, they tighten up. They don’t want to be in there if people are getting out. If all of a sudden, a bunch of stuff’s going on in the market, and oh, by the way, anybody new going to buy it, they can’t raise capital nearly as well because one out of four sources of money, they can’t take in anymore
By the way, if the IRS would’ve known how to interpret its own rules, when PayPal went public and they audited the PayPal five, Peter Thiel, Max Levchin and others who all did this deal, they could have got them then, because I’ll tell you, all the experts that I work with in this space were all like, that deal’s a prohibited transaction. We all have our different theories. There’s four different theories my friends and I have in this space, tax lawyers, IRA specialists, and so on, we all have four different theories as to why the IRS missed it. Basically because the IRS didn’t enforce its own rules, because they didn’t understand them, everybody’s now got to pay everybody’s punished.

David:
Is what happened, and I’m not familiar with Peter Thiel’s story, was he an owner of PayPal, it went public, he made a bunch of money, he put that money in his IRA, and then he just invested it from there, so he didn’t have to pay taxes on the capital gain and then he was able to invest in real estate without withdrawing the money and paying taxes at that point?

Jeff:
Max Levchin, Elon Musk, and the other two who I cannot remember right now, co-founded PayPal. They put $2,000 each from a Roth IRA, I won’t name the custodian, but I know who it is, and they put them into buying shares of the company when the shares were valued at fractions of a penny. Then the company took off in the next couple of years and so they had a huge windfall. Then Peter took that money, left it in his IRA, got in early on Facebook, scored another massive grand slam and so on. He did it, but I don’t … The first round was not kosher in my world.

Dave:
Is there anything in the legislation that prevents you from investing your money into a stock that could then blow up? Are they prohibiting that or just the real estate investors?

Jeff:
Oh, there’s nothing preventing you from picking a stock that goes down. There’s nothing preventing you from doing that. There’s nothing preventing you from putting your money in a mutual fund that goes sideways.

David:
Well, More so, what he did with, if you can still take your money and you can put it into a tech company like PayPal, that then explodes and you make yourself millions and millions of dollars, and that’s okay, but you can’t take the money you’ve already made, invest it into real estate. Is the logic that they’re trying to prevent another Peter Thiel, but they’re just doing it in a full hardy way?

Jeff:
I think the logic is more than that, because I also think that they’re trying to immensely lighten the IRS’s workload. The IRS has known for some time that people are using IRAs incorrectly due to a lack of education, due to a lack of knowledge, or just because they’re, hey, I can run the stop sign and not get caught. So, they’re like, we just want to shut it all down. We just want to make life easier for us. That’s why they introduced also Section 138314, which it doesn’t go after the accredited investor. It doesn’t go after the half a million net worth guys.
This goes after everybody because Section 138314 says, no IRA can own 10% or more of any entity, either directly or indirectly. So, if you’ve ever heard the phrase checkbook control, they’re gone. This bill passes, they’re gone. An IRA owned LLC, an IRA owned trust, an IRA owned partnership, an IRA owned blocker corporation, they are all history. Bye-bye. If you did it, you got two years to get all your money back out of that and restructure all those deals.

Dave:
Jeff, do you think that, I know there are certain people listening now who do invest using IRA, or even raised money from those. Do you think that if this passes, the fallout will just be contained to people using these methods, or does it have the potential to impact the rest of the housing market as well?

Jeff:
I believe that it has the impact to severely impact the rest of the housing market. This could be the domino that starts to chain reaction. When you’ve got to suck $25 to $40 billion out of the real estate space in the next 24 months, that’s going to create a great big vacuum. That’s not good. That’s not good. Institutional lenders are not going to come rushing in to replace it.

David:
Another concern I would have if this passes is it limits your average Joe, who’s been faithfully putting away money for 10, 15, 20 years out of their job, and now they’re investing in and they’re increasing their own retirement so they will be that’s dependent on the government when they actually get to retirement age, and it takes pressure off of social security and other programs. It opens the door for hedge funds and venture capitalists who can raise money very cheap, because they can raise so much of it to step in and say, well, your average American can’t do it anymore so I guess we’ll have to do it.
And they’ll take up all that market space that normally the people listening to a podcast like this, what I would just call your regular person is able to do, and that’d be terrible. They’ve got a big enough advantage as it is. If you take away one of the tools that your normal America can use to get into this game and to increase their retirement, it doesn’t mean that people are going to stop pursuing good deals. It means that the rich are going to get richer.
And it seems like every single time they try to tweak with capitalism and the way it naturally works out, the money always finds its way into the hands of people that already have more of it. Is that the same perspective you take or do you see a different outcome, Jeff?

Jeff:
David, I see it very much like that. I see it very much like that. Those hedge funds are just going to continue borrowing money, that they can get it so cheap. They’ll raise it in other ways. They can’t get it from IRA accredited investors anymore, but they’re not getting it from there anyhow. They’re going to step into the vacuum that this creates. So, we’re literally favoring that group of billionaires because there’s a couple of billionaires that we don’t like that got, that played by a different set of rules. To me that, is just so arbitrary, so capricious and it doesn’t make any sense.

David:
Yeah. That’s a great point.

Dave:
Yeah. I was just going to say, I mean, this sounds like a pretty serious situation, and all, us, real estate investors, should be paying pretty careful attention to what goes on here. Jeff, what do you think the chances of this actually passing are?

Jeff:
Well, I’m going to tell you what I think. When this first came out, I felt like looking at the overall political scheme, given the mega politics involving senators, Manchin and Sinema, given the slim majority of the Democrat party has in the house of representatives, I was like, it’s a 50/50 happening that this could kill us. 50/50. However, a very good friend of mine, attorney John Hyre, who’s an IRA genius and tax lawyer, he just loves defending people in front of the IRS. He and I and others have gotten very aggressive, very proactive in this space. And we have created some noise, and I would now give us a 60% chance of blocking these two provisions.
Doesn’t mean it’s going to happen, but I give us a better chance than we had before. John has done a lot of this through a website called handsoffmyira.com. I’m going to warn you now, John is very partisan. Handsoffmyira.com is not politically correct. It’s blunt, it’s factual, and it is to the point about what’s going on and why this doesn’t make any sense. For those of you that want down the middle of the road details, take a look at the show notes, you’ll see some stuff there. But we’ve been successful in reaching out to representatives, members of Congress.
For every investor we talk to, we asked them to contact your own member of Congress, contact your own member of Congress, and inside of handsoffmyira.com, there’s a way to go do that. Then we’ve identified an important eight members of Congress. They’re all moderate Democrats. One of them is the chairman of the Problem Solvers Committee. I love that, because in order to join Problem Solvers, you got to bring a member of the opposing party with you. You can only join it two a time, one D, one R. The chairman of the Problem Solvers is on that list of eight.
Two members of Congress from the State of Texas, who I have worked with for a number of years that are very understanding of real estate investors and their needs, they’re also on that list. I believe that we’ll be able to get their attention, their concern, and I think we’ve got a chance of getting these two detrimental provisions pulled out of the bill. Am I saying we’ve got this locked? No. Am I saying it’s an easy thing? Absolutely not.
This is a life and death struggle. This is an existential crisis for a lot of real estate investors and some of them don’t even know it. Taking advantage of the resources inside of handsoffmyira.com to contact, not only your member of Congress, but those important eight, is a crucial first step. Folks, I’m going to tell you, one phone call, one email is not enough. Do it every week. Do it every week. You have got to squeak very loudly in order to get any attention right now.

David:
Well, Jeff, this has been fantastic. Thank you very much for shining light on a somewhat complicated, but very important topic, that it sounds like it started being snuck into a much bigger bill that many people would’ve voted for because it sounds good. Who doesn’t like a new deal style, get that economy pumped up? That’s how it’s being portrayed, but there’s a lot more going on than what is actually being advertised. Before we let you go, is there any last things that our audience should be aware of you’d like to highlight?

Jeff:
I would tell you this, this is going to impact you in the real estate space, whether or not you have an IRA, whether or not you self direct, this is going to impact you. It’s going to impact you, either directly or you’re going to be collateral damage. Either way, you need to pay attention to this and you need to let your voice be heard, because unless you want to see restriction after restriction, after restriction placed upon how you can invest your money, and unless you want to see this housing market get turned sideways to where hedge funds can buy more and buy more and investors get less and less and are forced to sell, unless you wanna see all that. You need to take some action on this thing.

David:
All right. Well, Jeff, thank you very much. We appreciate your time. Hey, for people that want to, where can people find out more about you?

Jeff:
Oh, hey, thank you. I have an educational website set up. By the way, I got to say, everything I’ve said here today is educational. None of it’s legal advice. My educational website is watsoninvested.com, all one word, watsoninvested.com. I’d spell it, but I might get something wrong on it, so I’ll just include it with the show notes that you guys have got and we’ll roll from there. All right?

David:
All Right. Thanks Jeff.

Dave:
Thanks a lot, Jeff.

Jeff:
Gentlemen, it has been a privilege and an honor, and I want to thank you for working with me on my schedule and appreciate it so much. Big fan. Peace.

Dave:
All right. Wow. That was a really helpful conversation from Jeff. I learned more about self-directed IRAs than I think I had known cumulatively in my entire life before just then. What’d you learn?

David:
Everything. I don’t have an IRA myself, so I haven’t been investing from it. What I was thinking actually was the best case scenario is that this stops from passing, we get it out of the bill, and then everyone who didn’t know about it, like me, that has a self-directed IRA that’s listening to this says, shoot, I better go start investing with that money because I don’t know how long it’s going to be around.

Dave:
Yeah, absolutely. I have never really taken advantage of it, but when he was talking about all the money that might be forced out of the housing market, just because there’s this two year deadline to get out of it, that would worry me a little bit. So, I’ll be keeping a very close eye on this, but so now in this show we’ve talked about two really interesting things that real estate investors need to be on top of right now.
First is inflation. Now we’ve learned a little bit more about what’s going on with self-directed IRAs. What should real estate investors be thinking about and be doing right now to adjust to these new challenges?

David:
First thing is that, a big reason why I got into real estate investing, well, actually, why I got into it was accidentally. I just fell into it completely backwards. But when I said, hey, yeah, why I want to stay in it, why I want to double down and put more effort into it, was that I recognize what an incredible hedge real-estate was against inflation and I sort of could see that just buying a lot of real estate and holding it for a long time will make you look a lot smarter than you really are. I would hear about stories of people that were like, oh, we bought a house in the bay area for $16,000, and that was worth 1.6 million.
And everyone would say, “Wow, they were so smart. They bought a couple of those houses.” But when they bought them, they weren’t smart. They didn’t know that was going to happen. They just bought real estate. The lesson I took from that was real estate will make you look smart if you buy a lot of it. Then I sort of just rearrange my life to sort of suit that goal of owning a lot of real estate. But I’ve got five reasons why real estate works as an amazing hedge against inflation. I can get into those if you like.

Dave:
Yeah, let’s do it.

David:
All right. The first is the concept of leverage. So, put simply, if you buy a $500,000 house and you put 10% down, you’ve invested $50,000. Now, let’s say that that asset goes up by 10%. Now you’re at your house you bought for 500, it goes up by 10%. It’s worth 550. So, you’ve theoretically made $50,000, but you only put 50,000 of your money into it. That’s a 100% return on your capital. Compare that to buying a stock. You buy $500,000 worth of stocks. Those stocks go up by 10%. You make $50,000, a 10% return on your capital.
Because real estate is so easy to leverage compared to other investment vehicles, when the prices go up, the returns are amplified significantly. Now, this will also work against you when prices go down if your property drops by 10%, so you bought it for 500. Now it’s worth, say 450. You’ve lost 100% of your investment, but it’s a paper loss, right? You’d just wait to come back up again, and it always does. So, even your losses are mitigated and your returns are amplified, which is very unique to real estate because it is so easy to leverage. Everybody wants to give a loan secured by real estate as opposed to anything else.
Another is that, when you borrow money to buy real estate, yeah, number two, because this is leveraged, you’re paying money back with cheaper dollars than what you borrowed it at, which is very important to recognize. When I borrowed the $400,000 or $450,000 to buy this $500,000 house, five years later, I’m paying it back with cheaper money because my money’s worth less. The third would be that you can expect to see increased income because of inflation. So, the rent that you’re charging goes up every year. We all just take that as a given.
Yeah, rent’s going to go up. Well, why does it go up? Because inflation. That’s the really, the only reason why. Sometimes you buy in a really good market and you just outsmarted everyone, and there’s a lack of supply. So, supply and demand factors make rent go up. But in general, it’s by inflation. People get paid more money at their jobs so they can afford more rent. Everybody else’s rents going up because of inflation, boom, you win. That leads us to number four. You only win when rents go up because your expenses stay the same.
If you get a 30-year fixed rate mortgage, it stays the same. Your property taxes will largely, almost always stay the same, for at least a long period of time, unless you call attention to your property and ask them to reassess it or if you sell. The expenses that do go up, things like homeowners insurance or your HOA, are typically a very small portion of your we’re all payment and so they don’t affect you nearly as much as the gain that you’re getting.
Then the fifth reason why real estate is a great hedge against inflation is because it allows you the opportunity for the cash out refi. When inflation makes your property worth more, if you couldn’t refinance it, your only way of realizing that gain would be to sell it and then buy something and else. What happens is you end up selling high and buying high. If the deal you’re buying has a lot of meat on the bone, like forced equity, you can make that work, but in just a typical apples and apples comparison, you don’t really win selling high and buying high.
In fact, sometimes you lose because you went from lower property taxes to higher property taxes because now you have a new assess rate. Well, when you can use a cash out refi, you can get access to the money that you’ve made in that deal without seeing a capital gain event, and you can go reinvest that money while still keeping the same asset and setting a whole new clock of inflation working on whatever properties you went to buy.
All of these strategies that we use in real estate, I mentioned a couple of them here, are supercharged when inflation comes into place. Now, I do want to say, if you get into a period of, I don’t want to say deflation, because I think that the term for deflation is not the opposite of inflation, but when prices are going down, it hurts you twice as much, just like it helps you twice as much when prices are going up.
This isn’t like a no way you could possibly lose scenario. It’s more of a very difficult to lose if there’s a lot of inflation. Real estate was built for inflation.

Dave:
That’s a very well said summary of the good hedges. I’ll also add one more that I’ve been talking about a little bit, which is you actually mentioned it earlier about loan paydown. If you pay down just your loan, even without cashflow, even without appreciation or inflation, you are making, on average, about 5% to 6% compound annual growth rate. That is enough to at least keep pace with current inflation right now. Even if things aren’t going as well as you’d hope they do, even if inflation doesn’t take off in this huge way, real estate investing just has this very high floor where you are going to probably, at a minimum, as long as you can have enough liquidity to hold onto your properties through ups and downs, you’re going to add a minimum, probably, maybe I think 5% or 6% on your money, which is enough to outpace inflation.
So, you’re always going to … You’re not going to be losing money like you would be putting it into a bond, or a CD, or a holding cash right now.

David:
That’s a great point. That should give confidence to the newer investors that are saying, “I don’t know what if it doesn’t cashflow or what if it doesn’t go up as much as I thought? Really, paying down your loan in many cases is at least getting you to break even with inflation, and the cashflow and the appreciation are a icing on the cake. If you could just hold it for long enough, you’ll make money in real estate just paying down the loan. In fact, I remember, maybe 2004, 2005, I had this thought for the first time, that when I was looking at estate back then, nothing cash flowed in 2005, especially like it was just really expensive.
But when I looked at it on a 30 year scale, I saw like I’m losing money for the first five, six years, and then I’m breaking even for a couple, and then I’m making money for the last 20 years. It made sense to me that if I’m buying it from a 30 year perspective, why do you have to make money out of year one to make money in real estate? You don’t have to be making money in year one. The reason that became preached so often is that most, I shouldn’t say most, many people don’t manage their own finances solid enough that they can support a property that isn’t cashflowing from year one.
Then when 2010 hit, everything cashflowed. It wasn’t, is it going to money in year one? It’s, how much money is it going to make in year one? And how do I maximize how much I can make? But the point is, if you look at it from a really long perspective, unless you buy in a really bad area, it is almost impossible to lose money in real estate. Just paying the loan down, even if rent never went up for 30 years, you’d end up with a very solid cashflowing asset when you got into retirement. The way you win at real estate is by playing the long game.
It’s by waiting it out, and that is another thing that inflation supports. The longer I wait, the more inflation I see. If we just mentioned the 5% rate we’re at right now, that sounds unhealthy, but it doesn’t scare people. But look at that over a five year period. It’s actually more than 25% because it compounds, so whatever that ends up being like 26%, 27%. That is a really big number. Consider a house you’re looking at right now and add 25% to the value of it. That’s very, very steep. Now compound now over 30 years. This is what we’re talking about right now. If you’re buying good reals state, if you’re living beneath your means, if you’re managing your money wisely, if you’re in it for the long haul, and if we see this much inflation going on, owning real estate starts to look like a no brainer.

Dave:
Yeah. I completely agree, and love what you were saying about not … Just sticking around for the long term. I think you and I have talked about this, but so many people get caught up in the cashflow and how much they’re going to make in year one or year two. If you’re going to retire immediately, yeah, sure, you should probably be focusing on cashflow. But I like to say that it’s really more about liquidity than is about cashflow, because a cashflow, for any one deal, if you’re investing for 30 years, is not super important, at least in the first few years.
But liquidity, the ability to weather a storm is super important, but that doesn’t have to come from the deal you’re talking about. That could come from your full-time job. That could come from another deal that you have that’s throwing off excess cash. As long as you have liquidity that can help you weather the storm, you’re going to be making a lot of money over the long run, and I think this is why Dave and I are so passionate about helping people understand that this is a unique opportunity to buy in with low interest rates and take advantage and get into the market before, listen, we don’t know for sure, but what is likely to be an extended inflationary period over the next couple of years.

David:
Thank you very much, Dave, there, you have it. All right, everybody. We are going to get you out of here. This was an extra long episode because we care extra more about the fact that you need to be protecting your wealth. Do me a favor, leave a comment on YouTube and on the show page for this episode. Let us know what you’re thinking, what questions you have we didn’t address, what we could do a better job of explaining. We really want to hear from you. Also, please follow bigger pockets on social media, as well as me. I’m davidgreene24. Dave, what are you on social media?

Dave:
I am the Data Deli now. I just started a brand new social media account.

David:
That’s you? I was wondering who that was.

Dave:
Yes, I am the Data Deli.

David:
I saw it in my feed.

Dave:
Sandwiches.

David:
That’s funny. He loves sandwiches.

Dave:
Data, you get it all.

David:
He loves numbers. The perfect match.

Dave:
Well, you remember, when we did the first one of these shows with [Cathy Vicky 01:09:11], I embarrassingly had to admit I didn’t have an Instagram, and I went on made one.

David:
Right on. So, follow the Data Deli as well. That is hilarious. We’re gonna get you out of here. This is David Greene for Dave, the man from Amsterdam, Myers, signing off.

Speaker 2:
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Congress’s $40B Sucker Punch to Real Estate Investors is written by The BiggerPockets Podcast for www.biggerpockets.com

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