Building A Portfolio For Hyperinflation
For property investors, debt today can become irrelevant in the future, once inflation kicks in.
Not sure what that means? To explain, think of it like this. If a house in 1970 cost $20,000, and you paid interest only on the property while renting it out from then until today. You would still owe $20,000 on the house today.
You could pay the value off with one year’s worth of rent (as long as it was earning $400 a week in rental income).
Back in 1970, the average yearly wage in Australia was $6000, so $20,000 then would feel more like $300,000 plus to us. The point is, over time, inflation sees everything cost much more money in the future, but the principal that you owe on a property will stay right where it is.
What about hyperinflation?
So, 1970 to 2020 is 50 years’ worth of inflation, but what would happen if the economic situation ended in hyperinflation? We might experience 50 years’ worth of inflation in 10 years or less.
Today’s average wage is closer to $90,000 a year; meaning it is 15 times more than it was 50 years ago. Based on that trend, you would expect to see people earning $1 million a year on average by 2070, but if hyperinflation was to occur, that could happen by 2030 instead.
Think about the debt you currently have in investment properties or even your own mortgage… doesn’t seem like that much if you and your tenants were on seven figure salaries, right?
Is an ordinary property goal?
Binvested founder Nathan Birch began investing in properties with a simple goal. Accumulate 10 investment properties and that would give him enough passive income to earn an average wage, without having to work. As you may know, he achieved that pretty quickly and has since built a portfolio of 200 properties.
To build a portfolio like this in the current environment, might first buy 5 properties at $200,000 each. That’s $1m worth of property. They are each rented for $300 a week, which is a total of $1500 a week in income.
Obviously, there would be loans attached to the properties. Over the coming years you buy 5 more properties, also for $200,000 each.
Over the next decade, each of the properties has doubled in value to $400,000. You have purchased $2 million worth of property and it’s now become $4 million worth. You could sell off 5 of those and use the money to pay off the other 5 properties.
You’ve then got 5 properties unencumbered, returning you $300 each a week; that’s $1500 a week coming through on a cashflow front.
What happens when hyperinflation comes to the party?
Nathan has recently said he gets excited by the potential for hyperinflation because of what it could mean for his and his clients’ debts.
Imagine his basic goal of 10 affordable properties with hyperinflation taken into account.
If someone’s earning $50,000 a year and they’re paying $300 a week rent on the property, they’re paying $15,000 a year in rent.
If hyperinflation saw wages, costs and other things all increased by 10 times, those same renters are now on $500,000 a year and they’re paying $150,000 a year in rent.
But your debt hasn’t been hyperinflated; you still owe $200,000 on each of those properties.
Before you know it, you will be able to use the rent to pay off all those loans, without needing to sell off 5 like in the example above. You’ve got 10 unencumbered properties earning you rental income. That rental income of $150,000 a year per property may only be worth the equivalent of $15,000 a year in hyperinflation, but even so, you are now earning the equivalent of $150,000 a year in income from the portfolio of 10, without owing any more to the bank.
Most people can live off $150,000 a year and support their family.
Our clients would benefit
Over the last 10 years, Binvested has helped clients buy 10, 15, or even 20 properties. Those properties go up in value, clients might sell off some of them to pay off the others.
If we were to have a hyperinflation scenario, those same clients could use debt, property and leverage to take advantage and accumulate significant wealth.
Hyperinflation is, for now at least, a hypothetical. But this is definitely serious food for thought.