Pay Today’s Debt With Tomorrow’s Dollars
Have you ever wondered why most investors pay interest only on their investment loans? At least for the first few years?
Well, when you invest in a property today, you get a debt that must be paid down over time. But if you pay interest only until the time when inflation makes your debt seem irrelevant, you are essentially paying down today’s debt with tomorrow’s dollars.
Think about it. If you had bought a house for $50,000 in Sydney in the 1970s and only ever paid the interest on the loan, you would still owe the full $50,000 today. Only that doesn’t seem like a lot of money compared to what it did 50 years ago. In fact, you could pay the lot down with a year’s rent. The debt you purchased in the 1970s can easily be paid off with today’s money.
Cash loses more value every day
As b Invested founder Nathan Birch has noticed, the cost of groceries, fuel, bills, all sorts of things keep going up and up.The more money they print each week, the less tangible value it actually has. If you have $1000 today, it will be worth less next week than it is now.
So, when in the future will it ever be worth more? Never. As Nathan says, “money never buys you more than what it does on the day you earn it”.
And at some point, Nathan believes our currency will become completely worthless, at which time hyperinflation will occur and the prices of everything will skyrocket.
So are property prices in a bubble?
Nathan believes we are in a bubble, but not just for property, for food, goods, everything, because the prices are being manipulated.
In 1990, if you bought a house, you could get a quarter acre block. Now, you might get 200 square metres with no garden. Eventually, you’re getting something that resembles the room of a prison when you spend $1 million plus in Sydney
The quality of the food you’re getting is worse and you’re getting less of it for your money.
So will we see a property crash? We could if there was deflation. Deflation would wreak major havoc on the whole system and Nathan says the central banks of the world know that.
So governments keep creating currency out of thin air. And that’s what causes inflation, which is a silent tax that everybody is paying today.
Build yourself an arc
Nathan says the best way to counter hyperinflation is to take as many quality assets like property as you can through this current time and hold on.
Holding on is key, as early Bitcoin investors would attest. Once the world goes through its currency reset over the next decade, you want to be able to emerge with all your assets and a wildly inflated salary to pay down the existing debt.
Million dollar salaries
One of the effects of hyperinflation could be that someone who was earning $50,000 a year five years ago may end up earning $1 million a year for the same job in the not too distant future. Sounds good right? But not if they’re paying $250 for a fast food meal. It is all relative and they will still struggle to stay afloat.
But let’s just say they have a number of investment properties, for which they owe $200,000 or $300,000 a year each. These can be paid down pretty quickly in the world of million dollar salaries, not just by the investor, but by the tenants paying hyper-inflated rent for the properties.
Easier than in the old days
You can not only pay today’s debt off with tomorrow’s money if the above scenarios come to pass, but you can do it much easier than someone who bought back in the 1970s. You might say they were lucky to buy their house so cheap, but they went through stages of paying up to 20% in interest on those properties, which made it extremely difficult just to service their loans.
The interest rate environment right now is at historic lows. Even if loan repayments went from 2% interest up to 4 or 5% over time, they can still be inflated away and paid off with tomorrow’s money.
To watch the full podcast episode on ‘house prices have never been cheaper’, click here.