EP 81 – Inflation Today & In the Coming Months, Rents Cheaper than Mortgage Payments & Utilizing Your Equity

We were supposed to see inflation drop in May, but that was definitely NOT the case. With a rise in inflation, what does that mean moving forward? And what are the numbers telling us is likely to happen in the coming months in regards to inflation?

Adam Schroeder examines what the commodity prices are showing, as well as why rents are likely to continue increasing and why rising rates shouldn’t deter you from tapping into every resource you have to acquire assets.

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Transcription:

Hey rent to retire’s, it’s Adam Schroeder here for another episode of our podcast today, I’m flying solo again. And I want to get started talking about the thing on everybody’s lips these days. And that is inflation. We saw the number come out for May and it was higher than expected, they were expecting the 8.5% from March to go down to 8.3%. But instead, we saw a rise to 8.6%. Which what does that mean, for us? Well, it means that we are not going to be seen, the Fed slowed down on what they’ve been planning to do. So we will continue to see the interest rates rise, we will continue to see them pursuing the same Avenue they’ve been taking as they try to tamp down inflation. So don’t expect to see mortgage rates plummeting anytime soon, as people continue to see higher rates. And you know, maybe we’ll see the housing market slow down a little bit more, but I want to talk a little bit about that slowdown as well. But first, I want to talk about what we might be seen for inflation moving forward. Now one of the things that you can do to find out where inflation might be headed, is to look at futures contracts. Because future contracts are what commodity the people in the commodity business are looking at. It tells you what they are expecting, you know, for the next few months, you know, you might see futures like right now you can look at futures for gold for August. I mean, I’m looking at Silver for July copper for July, you know, oil for August, natural gas for July. You know all of these things, most of them are for July, some of them are for August, some of them are for September. But looking here at these commodities, the real time commodity future prices, every single commodity price is down, except for crude oil, which is up about 1% Brent oil, which is up about 1% and wheat and rough rice are up point 03 And point zero 5%. As well as lean hogs up point one 6%. But all of the other things are down lumbers expected to go down 2.73% Coffee is expected to go down to point zero 1% soybean meal and soybean oil one and 3% for one and one and a half. For the other. You know, we’re seeing all of these things, copper

is expected to go down 1.52%, we’ve got a lot of copper wire, and the homes that are being built, we are seeing these things start to slow down and for manufacturers for all of the people dealing with these commodities day in and day out, are buying futures contracts at lower levels than they are today. So that is good news for inflation probably starting to slow down in the near future. But you know only dropping 1% 2% probably isn’t going to send us down into the inflation rate of you know, the two to 3% of the Fed likes to target. So we’re going to continue seeing inflation being a concern for those in charge. And also for those people trying to, you know, make, make a living and afford to do things who aren’t investors. So expect kind of business as usual for the next few months. Your strategy based on inflation shouldn’t really change. And as we discussed time and time again here on the show and what you’ll hear all throughout, you know investors, real estate is going to be your best hedge against that inflation, even with higher rates because here’s what I want to boil it down to. People are talking about the housing market slowing down. But the big thing you need to look at is what housing is slowing down. Because the housing market is way too broad. We need to segregate the housing market into batches. One of the things that we’ve discussed on this show our starter homes, which is the homes that we’re buying, honestly as investors because we’re not buying your $750,000 single family, you know owner occupied homes or the 2 million 3 million, you know if we’re spending 700,000 Or a million that’s gonna be for a short term rental and a really nice place where you can still get solid returns, but you’re not doing that as a long term rental most likely, you know, we’re buying those in the 150 202 5300 range. And those homes

are not being built anymore. Those homes, you look across the country, those homes are being gobbled up, we put one of our properties up for sale just a few weeks ago in Little Rock, this is myself personally sold in, under we had multiple offers within three days for over asking price. And this is with interest rates, over 5% for owner occupied IDs. You know, we’re seeing investor rates somewhere in the you know, six to six and a half percent. You know, we are seeing high interest rates now. And we are not seeing buying in the lower end, slowing down. So when you hear about, oh, the housing market is softening? Yeah. If you’re looking at, you know, a million and a half dollar home, and suddenly your rates gone from 3% to five and a half percent. Yeah, that market is going to soften because that is an enormous jump in price. But when you’re talking about 100 $150,000, home that you can’t find, well, guess what? That’s still in demand. These are the types of homes that are not going to see the amount of softening that we’re seeing in other places. And that’s why it is so important to not just look at the housing market. Yes, we are seeing slowdowns in mortgage applications. But where where are we seeing the slowdown, what types of homes are seeing the slowdown and I can tell you this much. We are not seeing it. in these in these sectors. We are seeing continued bidding on homes, we are seeing continued demand. And we are seeing continuous appreciation to be quite frank, you know, we are paying more for homes now than we were a year ago than we were six months ago. Because their prices continue to be pushed up by demand. And even those people who are planning to buy a $300,000 homes, maybe now they’re buying $200,000 homes, so they’re competing with more people. And we’re seeing prices being pushed up more and more. So when you look at what we’re buying, and what’s going on in those markets, you will see that the situation is significantly better than in other areas. You know, we’re not buying and, you know, California and Southern California, you know, Bay Area, California or anywhere like that. You know, we’re not buying in New York City. We are buying in markets that makes sense that have starter home type places available, that our teams are able to get in there by in turn into nice rehabs for renters to get. So now let’s turn our view over towards rents. So what’s happening with rents right now? Well, in the rental market, Redfin did a study of over I believe

it was 20,000. apartment buildings across the country, and rents for the first time ever, nationally, are over $2,000 a month. That is up 15.2%. Year over year, we saw some massive gains in many markets, one of the main my home market aussehen, which saw a growth of 48.4% year over year. And here’s the beautiful thing. This rent growth is being exacerbated by the rising home prices and by the rising interest rates because now we have finally reached the point where rent payments are decently cheaper than mortgage payments. And when that happens, people are not as driven to get into the housing market. You know, if they were, you know, waffling one way or another, they’re going to look and see, hey, this renting is a pretty good deal. You know, I’ll continue to save up money. I’ll wait for the slowdown, which may or may not happen. You know, people love to think that they’ll wait until the slowdown well guess what 2008 was a long time ago. If you’ve been waiting for the slowdown since 2011 2012, or you’ve been waiting a long time. If you’re waiting for a massive slowdown now. Well guess what? You’re probably going to be waiting for a very long time. When you have a 15% rent growth across the country on average. Granted, you have to break it down by market. Granted, this is for apartments, not single family rentals because those are a lot harder to track.

You know, they don’t have, you know, I’m not reporting, my rents that I’m getting to some service like apartment buildings are because for them, knowing the average rents that are going on is very helpful for their business. You know, we are looking and trusting our property managers in the area to know what’s happening to see, you know, this is why you want a property manager who has a decent number of doors because they see what they can charge other people for homes that are similar to yours. So it’s important to look at that. But we are seeing the continuous rent growth across the country, which is leading to, you know, returns becoming better. I mean, I will grant everybody I’ve said this before, year one returns are compressed. But here’s the beautiful thing, if you end up with a negative tax burden, not cash flow, obviously, we want a positive cash flow every single time. But when you end up with a negative tax burden, you can just roll that over to the next year. And when your next year sees rent growth, you know, let’s say it’s only 6% 7%, you know, even 5%, God forbid, you know, even though historically, you’re you’re probably looking at two to 3%, which is a good, good amount to go up. So when you see that happen, well, you’ll still have some leftover from the previous year that you can add on there, so and your cash flow will continue to grow. Because guess what your mortgage payment doesn’t like we talked about all the time, you’re looking at your mortgage rate being fixed, even if you’re doing an adjustable rate, your mortgage rate is fixed for, you know, at least five years, if not more, if not 30. So, you know, just look at that, whenever you’re seeing what’s happening. So rents are being pushed up across the board. We’re seeing this in all of our markets, it is a great, great time to be a landlord in today’s United States. So people who are sitting around on the sidelines thinking, Oh, I’ll wait, I’ll wait. I’ll wait. Well guess what likelihood is you’re gonna keep waiting. I mean, the Fed is not sitting here saying our goal is to cause deflation. Our goal is to Jack interest rates up until nobody ever buys a home. That’s not what they’re trying to do. They’re trying to slow things down, not turn them around. That is not their goal, they would rather see the reason they have that two to 3% inflation goal is because deflation would be devastating for her economy. We don’t want that if we can avoid that, we will do anything in our power to avoid doing that. So that is why they’re targeting that two to 3% inflation. People don’t like it, because it devalues your money over time. But it’s a lot better than seeing what would happen to the economy. If deflation happened, because that would be a brutal, brutal thing to see. And finally, the thing that I want to address to wrap it up is refinances. We are seeing a slowdown of refinance applications across the board in the mortgage industry. But I want to touch on it just a little bit. Because

since we have seen rates increase, a lot of people are thinking now might not be the time for refinance. And maybe for you it doesn’t make sense. But I want to posit one thing that I have discussed several times on the show. And that is quite simply, your interest rate is only there to tell you how much you owe. If you’re looking at pulling money out, the question you have to ask yourself is with this interest rate, what is my payment? What does that make my cash flow? And how much money can I pull out? If you tell me, Adam, I have a property that I can pull $40,000 out of still positive cash flow $200 $250 a month, but it will raise my interest rate 1%. It’ll raise my interest rate, one and a quarter percent.

The question I want you to ask yourself is, is that worth it? Don’t cover just cover up that interest rate number and look at your new stats. Look at your new numbers and see is this worth it? Can I pull out this money? Get it and use it to get returns somewhere else or does it make more sense number wise to keep my My current rate, my current payment, my current cash flow and leave my equity sitting in the property. Or does it make more sense to go and get a HELOC? You know, Zack and I did an episode about this a little while back, where we talked about he locks versus refinances. But I want to let everybody know that just because mortgage rates have increased, does not mean you shouldn’t be considering a refinance. That’s why you should go to rent to retirement.com and schedule a call with us to discuss your current portfolio to discuss what your options are, you know, you might be able to get a HELOC with a relatively low rate that will allow you to pull out that same $40,000 and leave you in a better situation. Or maybe it makes more sense, because it’s only going to raise your rate, you know, half a percent if you bought it, you know, six, seven years ago, you know, I have some properties where if I did a refinance, it would go up half a percent, what do you do, right? You know, increase my rate a little bit, I don’t really care, because it’ll still cash flow, I’ll get a lot of money out. These are things that you have to look at as you grow your portfolio. So go to rent to retirement.com, schedule a call with us. We will help you look at your portfolio and see how can you best utilize this equity because remember, money sitting in your property is doing you no good. It is just sitting in there waiting to be deployed. Why would you leave it sitting in there if you needed it, or if you could use it for other investments. If you can get into it, tap into it, and start moving forward with your property. And using that to scale your business. Because when you look at real estate and how you’re going to really scale your portfolio, it is utilizing every asset that’s available to you. And your property is an asset that is available to your property is sitting there gaining value. But that means nothing if you don’t take advantage of the value, it means nothing. So get in there, run the numbers, and see what can I do with this to make me more successful down the road. So like I mentioned, head on over to rent to retirement.com schedule a call with us, we will look over your portfolio help you make a plan. If you don’t have any properties right now, we will help you formulate a plan to get you to the point where you can deploy the equity in your rental properties that you’re going to buy and be a successful investor that way. That’s rent to retirement.com really appreciate you listening to this episode. I hope it’s been useful. If it has, please head on over to your podcast platform and leave us a review. Really appreciate it. It lets other people know that it is a podcast worth them spending their time on. If you have any questions, email them podcasts at rent to retirement.com That’s podcast at rent to retirement.com and I’ll talk to you on the next episode.

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