We probably (hopefully) will never go under a 1% Fed rate ever again. But the next time we dip, be maximally prepared to take advantage of it.
The Playbook
- Borrow
- Invest
- Repeat within reasonable limits
1. Borrow to win the fiat game
Reminder: inflation is driven by money creation. That’s it.
It’s more money chasing the same or fewer goods.
Unfortunately, the cheaper money gets (i.e. when interest rates lower), the more money is made.
If you want to buy a house, and interest rates drop, house prices rise by virtue of there being more money chasing the same amount of goods. This happens whether you join in or not.
It’s a tragedy of the commons.
Therefore, it behooves you to at the very minimum be in as many hard assets as you can (i.e. stocks, real estate, Bitcoin). Stuff that is hard to inflate.
To win during this environment, you need to borrow and invest.
Yes, this is a vicious cycle because by borrowing, you are now contributing to inflation. That’s why it’s a tragedy. This is the nature of fiat.
2. Invest in hard assets
Borrowing doesn’t matter if you don’t then put it something else to ride the inflation wave up.
It’s easiest to borrow money when it’s for real estate. So that’s what I’m doing.
(I still love Bitcoin, but I do not borrow money to buy it, and probably couldn’t if I wanted to.)
Put 20% down for investment properties, or 5% down if you’re going to live in it, too. You can do this as long as you can find a lender—typically up to 35% of your debt-to-income (DTI) ratio. You may not be able to do this if you’re in a house that’s too expensive for you.
The obvious factors have to be there: rents should be meaningfully higher than mortgages. You may also refinance your own home to get a lower monthly payment so you can have a more attractive debt-to-income ratio, allowing you to pick up more debt to then invest with.
Be more aggressive and get a multifamily. Reduce your risk of a tenant moving out (or needing to be moved out).
3. Repeat within reasonable limits
If you do this once or twice, and are maxed out at your DTI ratio, it’s wise to stop. You’ve won this hand of the fiat game. Wisely add in margin and take your rental income and pay off as much of the mortgage as you can.
If we stay at cheap credit for a while, and you buy in early, you may be able to get even one more property in your portfolio.
Never go underwater. Never buy another property if your previous ones have vacancies. These things are themselves tells that the bubble will pop.
When the bubble pops, if you have rents that will (1) pay off mortgage, and (2) pay against principal, you’re in a good spot.
You don’t even need to turn the rental income into meaningful income yet. You are just going to pay off the rent and ride the equity increase as dollars flood the market in general.
Soon, even paying the minimum, your home value could rise 10–20%. You haven’t made rental income, but your equity is higher than ever. This happened to me this year, even in a high interest rate environment (because our economy is still playing catch-up via inflation from the money we printed the last 3–4 years).
My end goal is 5–10 units, which would effectively give me a second income—minus expenses, which would go down over the years as I pay down the properties’ principals.
Don’t Get Left with the Bag
Bagholders are people who:
- Felt panic and wanted to buy in before the opportunity went away
- Don’t consider costs of holding
- Assume the current environment will go on indefinitely
I will never buy a property just to sit on it. I’m not Blackstone. I want properties that preferably already have tenants in it at the time of purchase and don’t need major work. Maybe a property that’s safe enough to do short-term rentals (but that’s definitely more risky).
Buy in a cold, calculating way. This entire post could seem like a panicked urging to buy a house, but considering we are in a rough time for real estate junkies, I feel like that’s a good counter-indicator. In fact, if you buy when rates are bad (and you can still comfortably afford it), then they will only get more affordable when interest rates drop.
That’s why I’m already doing this strategy now, knowing I can afford it as it is. It’ll only get more affordable in the future (assuming my other sources of income don’t dry up and the city I’m in doesn’t suddenly vacate).
Summary
I hate the fiat game. I recognize this “solution” makes the long-term problem worse. But I also recognize this is the world we live in.
Borrow up to your reasonable limit, invest in safe, income-generating assets, and pay off your principal. If you feel nervous that a purchase is on the edge of what you can afford, don’t do it. I specifically aim at the cheaper end of what I can get in order to limit that exact risk.
I’m not buying what I think are the most beautiful properties I can afford. I’m targeting the ones that are pretty enough to live in, will retain their value (and therefore climb in paper value when more paper is printed), and can easily be rented out.
It’s a simple formula that’s been done for decades.
