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Jason Hartman only wants mortgage debt – and he will take out as much as he possibly can. He has been investing since he was 20 years old and learned how inflation is the enemy of home equity but the golden goose of real estate income property owners (my words, not his).
We first have to understand how inflation plays into this investment strategy and what “Inflation Induced Debt Destruction” is.
Concepts covered in this conversation with Jason Hartman
Jason says the classic definition of inflation is “too many dollars chasing a limited supply of goods and services, causing prices to rise”
- Raised prices are not the same as inflation, as we are led to believe
- The CPI (Consumer Price Index) is a basket of goods on which the government measures inflation
- Jason also describes Fractional Reserve Banking and Lending
Six ways the government can deal with the national debt
- Default: Unlikely to occur because it is politically unpopular
- Raise Taxes: Impossible to raise taxes high enough to pay off debt (even at 150%)
- Sell off America’s assets: Some of this is already happening (like toll roads)
- Use the military to steal: For the natural resources, history has shown this is to be true
- Technological innovation: Best option – but not the government’s first choice
- Raise inflation gradually: Most likely solution as it devalues the value of currency
“Inflation is an insidious hidden tax. It’s a robber and a thief that destroys our purchasing power. It destroys the value of savings, of stocks, of bonds, even of equity in real estate. But thankfully, it also destroys the value of debt.”
Jason goes on to share examples of how a $100 bill decreases in value and how it works in favor for a real estate investor.
Borrowing to the Hilt
“Inflation is the most powerful method of wealth distribution known to man“.
Jason only likes one kind of debt: Fixed rate, long term debt in the form of an income producing real estate property.
He tells the story of a couple who buys a house in 1972 with a 30-year mortgage [33:22]
The mortgage rate for a 30-year mortgage was 7.37%. If you put down 20 percent on an $18,000 home in 1972 then you would borrow $14,000 and the payment would be about $100 a month.
However, the dollar deflates to about 40 cents by 1984. This means the couple was only paying $487 per year (about $40.58 per month) in an inflation induced economy – even though the checks written to the mortgage company remained $100 a month.
Find more about Jason Hartman at JasonHartman.com
Disclaimer from Steve
This is not an endorsement nor is it a dismissal of Jason’s investing philosophy. Seek the advice of a professional before making any decisions that could impact your financial future.
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Wow what a great interview! Jason has a lot to offer. I love hearing view that challenge mine. I want to find any flaws in his line of thinking.
You almost got to one when you mentioned the area of risk as to why you want to pay off your mortgage, Jason mentioned correctly that you never totally own your property because you always have to pay real estate taxes. (Almost like renting from the government) And that is what he left out of his example of the person who bought a house in 1971 with a 30 year mortgage. His calculations totally failed to consider any expenses of owning a property for 30 years. Only one is Real Estate taxes which we have little control over. Even if the tax rates don’t go up (which they inevitably seem to do), the increased value of the property due to inflation will cause those costs to rise. Also that $18,000 house is not going to be worth $80,000 30 years later unless it is kept up. But more than that, you can’t just repair the furnace you will need to replace it with a more efficient one to keep up the home’s value. Same with windows, same with appliances. All these things cost money — and more money next year than last.
So why would you not follow what Ric Edelman suggests a big long mortgage, when you buy your house? One reason might be most people don’t live in a house for 30 years. Most of the cost of buying and living in a house occurs in the early years. The interest, for one, that is paid in a 30 year fixed rate loan is highest in the first years when less than 10% of the payment is equity. So if we move 6 times over 30 years, we are continually paying a lot higher interest than if we had chosen shorter term loans. I could go on with other reasons, but this isn’t my blog.
Keep up the great work and never shy away from a guest because he holds an alternate view. We need to have our beliefs challenged so we don’t become Debt Free Zombies.