Daniel Amerman - Turning Inflation into Wealth

[GlennG]

Hi everyone

I've been reading articles by Daniel Amerman

He seems to make a lot of sense to me. But I'd like to hear opposing opinions if there are any. He obviously would like people to buy books and dvds, but there is a lot to read for free.

Some people here would have already been reading his articles e.g on Safehaven

I have several questions, but just to start off

Somersofters who have made a lot of money from investment properties - do you think you have got wealthy because your properties have grown in real value or is it because you borrowed money, and the borrowed money got reduced by inflation?

If USA can't afford all of its debts (and more importantly, all of the future debts due to promises made to 'baby boomers') and thus to avoid default will have to engineer massive inflation - how will that affect us in Australia?

As i was reading his stuff I kept wondering what clever people on here would be thinking - such as keithj, Julia, Brenda, On the move, lizzie, bluestorm, skater etc etc

But please please no squabbling in this thread, plenty of other threads in which to do that!

 

[Propertunity]

Somersofters who have made a lot of money from investment properties - do you think you have got wealthy because your properties have grown in real value....

It is an interesting Q. Here's one for you. If I buy an IP now for $350K and in 10 years time it is "worth" $800K, and I did nothing to it to improve it in anyway, where did the extra $450K come from?

If I sell, I get $450K to spend on whatever I like. Money really is just a concept IMO.

or is it because you borrowed money, and the borrowed money got reduced by inflation?

THat is certainly one factor, but there are many more than just this.

If USA can't afford all of its debts (and more importantly, all of the future debts due to promises made to 'baby boomers') and thus to avoid default will have to engineer massive inflation - how will that affect us in Australia?

Oh, let's not get into that again I thought you wanted:

....no squabbling in this thread,

 

[Paul Do]

It is an interesting Q. Here's one for you. If I buy an IP now for $350K and in 10 years time it is "worth" $800K, and I did nothing to it to improve it in anyway, where did the extra $450K come from?

That is the opportunity cost of tying your money up in the IP.

Another way of looking at it is if you borrowed the $350k and invested it in the IP. You would have incurred a lot of interest which reduces the $450k (the net rent would have offset some of this). Also the $450k is a made up number. Depending on the historical period and location, it could have been that much or much less. Going forward, it's probably going to be much less in Australia.

 

[Nathan]

You are right, I have always worked along these principals and belive inflation is what save 90% of investors.

Inflation isnt just the 3%cpi, its more then this.

How much was paddle pop last time you looked? How much was paddlepop in 2001?

There double the price, thats 10% pa on a ice cream.

What about bread?

This was like $2 in 2001, now its $4 for a loaf of buttercup or tip top.

I have always said inflation makes debt irrelevant with time as long as there is strong cashflow to support it.

Personally I like to manufacture growth through buying below market value and occasionally doing a renovation but manufacturing the growth.

 

[skater]

Somersofters who have made a lot of money from investment properties - do you think you have got wealthy because your properties have grown in real value or is it because you borrowed money, and the borrowed money got reduced by inflation?

Interesting question.

I think it's probably a combination of both. Over time inflation will increase the real price of an asset. This may not be a linear increase and market forces will also be involved.

With borrowed money, presuming using an IO strategy, the dept will stay the same, however the purchasing power of the amount of the debt decreases with time.

Timing the market, doing reno's and buying undervalued properties helps too.

 

[VYBerlinaV8]

Somersofters who have made a lot of money from investment properties - do you think you have got wealthy because your properties have grown in real value or is it because you borrowed money, and the borrowed money got reduced by inflation?

It's both - the idea is to engineer it this way.

If you buy a property that is well located, and appears to be good value (for whatever reason), then that property should increase in 'real' value over time. Having the debt inflated away is the another side of the story. The third major part is that inflation increases the yield relative to your actual holding costs.

Being able to use these three aspects of property (even before you consider other value adding techniques), especially where you borrow some or all of the value of the property, makes property a very powerful long term investment vehicle.

I've already made a substantial amount in property, and without ever selling. And most of my efforts so far have been about setting up for everything to fall into place for retirement in about 10-12 years time.

 

[BayView]

Somersofters who have made a lot of money from investment properties - do you think you have got wealthy because your properties have grown in real value or is it because you borrowed money, and the borrowed money got reduced by inflation?

We have made some money from our properties because we continued to buy and increase the footprint. It's a compounding effect (yeah;yeah some will say it can work in reverse as well and all that - the overall LVR and cashflows are critical factors in mitigating that argument)

As the cap growth has increased by a percentage, our overall nett worth has increased in dollars markedly due to the footprint.

For eg; cap growth of 5% per year: someone with a footprint of $500k will increase their nett worth by $25k per year, while the the investor with $2.5mill will increase the nett worth by $125k without doing anything different to the $500k guy. But if the $2.5mill guy accesses the $125k for further footprint expansion;you see what can happen.

As well as the cap growth, we have further accelerated the nett worth and lessened the LVR through reinvesting tax returns and reducing debt through extra repayments along the way.

A lot of the money was borrowed progressively using existing equity for security and deposits, and I wouldn't know what the effect of inflation has been on that money, because our overall debt has been increasing virtually every year - but at a much less rate than our asset values have.

 

[BayView]

What about bread?

This was like $2 in 2001, now its $4 for a loaf of buttercup or tip top.

I can distinctly remember going to the milkbar (no supermarkets back then) for my Mother; to buy a loaf of bread and 2 bottles of milk (glass bottles) and a packet of Viscount 20's cigarettes for her.

I remember because I was really annoyed that she hadn't given up smoking and I was sent on errands to get 'em for her ( I was about 9 - about 1970).

She gave me $2 and I came back with change.

 

[alexlee]

Somersofters who have made a lot of money from investment properties - do you think you have got wealthy because your properties have grown in real value or is it because you borrowed money, and the borrowed money got reduced by inflation?

Both. Inflation acts on nominal wages, which increase the amount people can pay. In addition, population growth means a given property becomes relatively more valuable as it 'moves' relatively closer to the city, and more people with higher incomes shift outwards.

 

[coastymike]

Purchased the entire Dan Amerman serious and wading through it at present. Interesting reading. Pricy though but particularly like his book discussing asset deflation and monetary inflation and how to take advantage of such opportunities.

 

[bene313]

On the otherhand, it has been argued here before that the perceived gain on a mortgage deflating over time is offset by the interest rate/amount paid.

 

[alexlee]

On the otherhand, it has been argued here before that the perceived gain on a mortgage deflating over time is offset by the interest rate/amount paid.

I disagree, because interest paid on a loan is based on a loan amount that never increases. To put it another way, the deflation effect is compounding. Interest is simple interest. And as we know, interest rates are cyclical too. It's not like interest rates just keep going up on loans.

 

[Aaron Sice]

column a and b.

the value of the property has risen, but the value of debt has been reduced by inflation.

the issue is that IRs are not static lke the debt is. IRs fluctuate and this erodes or compounds the debt/inflation calculation.

 

[lizzie]

On the otherhand, it has been argued here before that the perceived gain on a mortgage deflating over time is offset by the interest rate/amount paid.

a ppor mortgage - yes-ish ... although the mortgage is reducing in relation to the value of the property due to inflation.

on an ip ... no, if bought well. the rent should cover the interest on averare - perhaps not quite at the beginning, and some left over at the end - so technically you are not paying interest on the mortgage whilst the property is increasing in value.

eg, bought for $300k, 10% deposit + costs of $40,000, increasing rent pays average interest and ongoing costs, value increases by $300k in 12 years ... you have just turned your $40k into $300k without any further cost to yourself

 

[lizzie]

gosh - remember when petrol was 40c/litre. only about 20 years ago.

perhaps i shouldn't fill my car up and just wait for the crash that we have to have - because petrol is just too expensive for people to buy anymore

 

[GlennG]

It is an interesting Q. Here's one for you. If I buy an IP now for $350K and in 10 years time it is "worth" $800K, and I did nothing to it to improve it in anyway, where did the extra $450K come from?

The way I see it - in times of high inflation it could have all come from inflation and no real growth of value of the asset. So 800K would roughly only buy what 350K would have bought 10 years ago.

But if you'd borrowed to buy the IP you would be in a better position due to inflation eroding the value of what you owe.

Nothing is black and white I guess, and people have pointed out factors that lead to increase in real value of IP e.g people in cities moving further out - hadn't thought of that!

I'll keep an eye on this thread to see if anyone looks into the Amerman stuff and decides to give their opinion on that.
Many thanks

Oh, let's not get into that again I thought you wanted:

Well, so far so good

 

[VYBerlinaV8]

Nothing is black and white I guess, and people have pointed out factors that lead to increase in real value of IP e.g people in cities moving further out - hadn't thought of that!

This is a major factor in property price growth, especially for property that is well located to start with. Consider too that rents will rise ahead of inflation in the same way.

 

[GlennG]

Purchased the entire Dan Amerman serious and wading through it at present. Interesting reading. Pricy though but particularly like his book discussing asset deflation and monetary inflation and how to take advantage of such opportunities.

How did you go with this coastymike and would you recommend people buy it?

 

[Andrew_A]

You are right, I have always worked along these principals and belive inflation is what save 90% of investors.

Inflation isnt just the 3%cpi, its more then this.

How much was paddle pop last time you looked? How much was paddlepop in 2001?

There double the price, thats 10% pa on a ice cream.

What about bread?

This was like $2 in 2001, now its $4 for a loaf of buttercup or tip top.

I have always said inflation makes debt irrelevant with time as long as there is strong cashflow to support it.

Personally I like to manufacture growth through buying below market value and occasionally doing a renovation but manufacturing the growth.

Well some smart commentators, and we can all pick and choose the commentators we agree with on the net have pointed out inflation as the end game for our current global situation. Reasonably simple premise when you have fiat currencies and governments prepared to add an extra 'zero' to the end of the bank balance when they see the hint of deflation.

Property in countries with little sovereign risk (think rocks in the ground and unlikely to be invaded) should do quite well I think on a longer term time frame, which is what most property investors have anyway.

Re: Inflation I can't believe I saw a caramel slice in a coffee shop the other day for $6.. I was shocked when they hit $4 back in 2007 and I'm sure it's not the same size either

 

[redwing]

Hidden Gold Taxes: The Secret Weapon Of Bankrupt Governments

Was an interesting read on that site for US Investors