News of inflation is dominating the headlines for the first time in decades. But what does it mean to an investor? In this episode, Frank and Ian talk about how rising prices influence their investing decisions. Disclaimer: Frank and Ian are only stating opinions and personal preferences. Consult with a professional before making any investment decisions.

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How To Profit From Inflation

This episode is all about inflation. Frank and I talk about the things we are buying, selling, our mindset and attitude in an economy like this. These are the opinions of two morons who have lucked into a few good things in their days. They are our opinions and you should do your own homework and research before you buy or sell anything ever. Even though no one’s reading this, if you are, make your own decisions.

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Super Bowl, we had a little party with my kids and Jenny. Did you guys do a big party?

We were getting over stomach flu. We did nothing. We all want to eat something. This is a perfect way to start this episode because we’re going to talk about inflation and where we are in the world. It was 2:00 and I was like, “I want to eat something that feels like the Super Bowl. Can we make nachos?” As a family, we decided to go to Whole Foods. We go to Whole Foods, shop for our stuff, and pull up to the register. I saw a person at the register, and I turned my head and I thought it was a woman. In any other year but 2022, you could say she, but I look at them and I’m completely confused. This person has green hair. I don’t know, so I’m like, “Max, say hi to they.”

I’m trying to make conversation and not to make it awkward. I don’t know how to act. The person there was friendly and very nice to Max. I’m like, “The Super Bowl is today. What do you think?” They’re like, “Honestly, I don’t have an opinion. I don’t pay attention to it.” I’m like, “Perfect,” and then they’re like, “That’ll be $100.” I’m like, “I was, in fact, at Whole Foods.” This is a perfect example.

It was Super Bowl. I took IJ to Fresh Market, which is not as expensive at Whole Foods normally. We were there to make Buffalo chicken dip, get some nachos, and maybe some root beers. I had two bags and it was $100. Buffalo chicken dip doesn’t have a lot of premier ingredients in it. It did have some chicken and the same thing, where I carried out the two bags for $100. I feel like I can’t go to a grocery store no matter what for less than $100.

Inflation is a massive part of what's happening in the world. Click To Tweet

I have a cook. She used to come to the house before COVID. Now she cooks offsite and brings us prepared meals. We get to pick what it is. I used to think it was an incredible expense and luxury, but it isn’t. If you order something for yourself from DoorDash, what does it cost? What’s the net cost?

It’s obnoxious. If I’m ordering Chipotle for three of us, me and the kids, it’s $50, $55. The $15 of it is fees and they guilt you into giving a tip to the point where I’m not using DoorDash nearly as much. Now, just out of principle, I’m like, “We’re getting in the car. It’s 2 miles away. We’re going to Chipotle.”

If you go into Whole Foods, Fresh Market, or one of those locally-owned grocery stores, neither of those is a discount place. You don’t go there for a discount. You go there because it’s convenient. You’re paying for convenience, but also at the back end of all of this is inflation. Inflation is a massive part of what’s happening in the world.

If you’re reading this and you don’t understand what inflation is, neither does anybody else, but let me show you what inflation is in its cleanest and easiest form. When I was living in Charlottesville, there was this pizza place. I loved it. Ian was there before. It’s called Christian Brothers. It’s incredible, great pizza. Inflation is this, you walk in and Christian’s Brothers’ slice was $3. They had hockey tape, that stuff that you’d use to either put on a hockey stick or you wrapped like a swollen finger, and they put over the $3. It said $3 and then the hockey tape, $0.50. That’s inflation. They haven’t even had time to order a new board, but the pricing of things had gone up to a point where it no longer was feasible.

They couldn’t make money on a $3 piece of pizza.

They had to raise it. Now, people are freaking out around the world with inflation, but it’s real.

 

Try to go buy a used car now. Used cars now are up 40% to 60% over the last few years to buy a used car. It’s a great time to sell a used car, but no one’s selling it because you can’t go get a new car. You’re trading one asset for another expensive asset. Where most people feel inflation or where most Americans get upset about inflation is at the grocery store because they go in there and they’re like, “$7 for a gallon of milk?”

My old man that I’ve talked about knows the price of gas at all eleven gas stations within 5 miles of his house. He can tell you like, “The one in Toledo over there, it’s $0.11 cheaper.” I don’t pay attention a lot to the price of gas, mainly because I don’t drive a lot. I’m stuck in my little town most of the time. I come to an office here and I don’t travel for work or commute. I fill up my truck once every two weeks. It’s not consequential. If you have a long commute and you’re filling up your tank twice a week, it’s another $50 a week. That’s a lot of money.

We’re going to get into why inflation matters. Most people are feeling the crunch. In my opinion, inflation is such a hot potato because people vote on the economy. They vote for the president, local government, Senate, the House, and on how they’re feeling in their pocketbook. Whether the stock market’s going up or the job market’s hot, that stuff doesn’t matter if people don’t have disposable income left after the check.

If your expenses are higher than what your income is growing, and that’s what’s happening now, is expenses are growing higher than incomes, people feel relatively less off than they did before the last election. That panics politicians. You hear the president or elected officials talking about fighting inflation and, “Here’s what we’re going to do.”

A lot of it is trying to create a perception that governments can do something about inflation. They’re pretty limited. By the time they start doing things, it’s normally too late and it’s fixing itself anyway. My favorite quote on inflation is, “The best way to fix high prices is high prices.” The meaning is that if your price goes up high enough, you kill demand of just about anything.

For the most part, if a price of a car goes up 60%, you keep driving the older car. Demand comes down because prices went so high, supply and demand at some point will meet. If prices get high enough, people quit buying certain things that demand cools and people have to drop their prices that are in business.

The best way to fix high prices is high prices. Click To Tweet

When I got into this business in 2009, I didn’t want to go broke. I was 32 in 2009. I was young.

That’s Warren Buffett’s first rule of business, by the way. Don’t lose money. Don’t go broke.

That was what I was worried about, but when I got a little bit older and I started thinking about things, I was like, “I also want to make sure that I have a hedge against inflation. How do I do that?” If you ever sit down with Ian and me, Ian is better at the stock market than me. He spends time on it and he understands it. He understands the charts and graphs and in an incredibly deep way better than me. He understands collision centers better than me, but I have an unfair advantage against almost anybody when it comes to single-family real estate in Central Virginia. I know it incredibly well.

What I did is I said, “I’m going to use the thing I understand very well. I’m going to bet on myself. I’m going to bet even in these moments when prices are down that they’re going to fix themselves.” I was at a banker event. One of the things that came up was this guy. He’s a curmudgeon, nice guy, but he’s a contrarian. He called me up in 2011, 2012, somewhere in there. He goes, “What the hell are you thinking? Why are you buying this shit?” I go, “What are you talking about?” He goes, “These shit.” I was like, “Give me an idea of what you mean.”

He goes, “Here are five houses you just bought. You bought this one for $18,000, $22,000, $26,000, $27,000.” These are thousands of dollars for houses. I said, “I’m buying them. There are 1/4 the cost of replacement value.” He goes, “These things are never going up.” I was like, “Okay.” He scared me. I’m like, “Maybe I am making a mistake.” What happened was there was a disparity in the market and those things went up and are worth $150,000 to $300,000 now. Some of them had some work in there, but what it was, was the market was down and we bought them.

This is an interesting thing that’s happened. We buy a bunch of stuff between Halloween and New Year’s. The reason we buy it is most people get distracted by the holidays. They’re not paying attention to the MLS and even in a reduced market. It’s not the time that people buy. People are doing things with their families. Professionals like us, this is when we buy. We bought eleven houses. These are $500,000 to $1 million houses on the backend between that timeframe. Three of them I’ve done nothing but wait for the City of Richmond to give me a permit and they haven’t gotten the permit done.

 

I went back through all of our inventory and I was like, “There was 7% inflation in December and in January. I’m going to go back and look at these assets and see what they’re worth.” I bought one for $355,000, it’s worth $450,000, and put it on the market. I bought another one for $325,000. It’s worth $435,000 to $450,000 and I’m putting it on the market. I got another one that we bought at $309,000 and I’m putting it on the market. The reason is because the market has changed because the cost of things has gone up.

That’s great the prices have gone up, but a lot of your business relies on buying something and estimating your cost to fix it up to get a certain price. Even though your prices go up, when you pro forma it, you’re getting a better price than you estimated, but if you’re being candid of the whole deal, you’re spending more on your subs and got delays on stuff because you can’t get appliances and other basic things right now.

I’m at least hearing this for most builders is, “Our pricing is going up, but our margins aren’t getting much better because all of our expenses are pretty brutal. We’re pissing a lot of customers off too.” You don’t have to worry about that so much because you don’t have a buyer in mind. You put it on the market when you’re ready. For people that are taking a lot in building something, they’ve got a lot of pissed-off customers because no one’s delivering.

What I’m going to answer your question of is this, I’m part of a mastermind group. One of the questions is, “Should you panel on inflation?” What the hell are you going to talk about? All you can do now is react. It’s like Ian called me up, “Frankie, I got a hot stock tip for you. In 2022, you should buy Bitcoin.” The time to buy Bitcoin was several years ago before it went exponential. Now, it’s another commodity and you have to deal with it. It’s what you got to deal with cabinets.

The thing is, though, there are still inefficiencies in the market. My electrician raised his price, but he hasn’t raised his price in off-work. It’s costing me margin because the market is reacting in accordance with it. These things are all happening. There will be a point and it’s going to come where it’s the opposite, where the market starts to drop. People like my electrician aren’t going to reduce their price immediately. They’re going to be very slow to reduce. There’s always this uncomfortable period in between.

The reason we’re talking about this is for this exact reason, from 2012 to 2016, I used to always talk about, “I want to have a hedge against inflation.” That was buying real estate. Whenever I said it, people’s eyes glazed over. They were like, “Who wants to talk about inflation? It’s never going to happen.” It is and it’s here. From 2011 through 2021, that was the time to hedge it. It’s too late now, so you got to deal with it. If you didn’t sell your whole portfolio or if you never bought, you’re dealing with it a lot more than with people who are. That’s a relevant thing to talk about.

Every human being is selfish and every human being has a perspective of one, as worldly as you try and be. We all have to take care of ourselves. Click To Tweet

I don’t know that you did this because of inflation, but something smart you did is you went and refinanced $30 million of debt in the longer-term debt at a lower rate. You refinanced and you don’t know the rates are going to go up or down. The Fed’s babbling on, and who knows, but it’s prudent. What you do know is, “I can get debt at the lowest I’ve been able to get in the twelve years I’ve been in business, so pigs get fat, hogs get slaughtered, and I’m taking this deal.” That’s smart because if rates go rocketing and you’ve got short-term debt and you have to go refinance, that could be up surprised the upsize. It’s better to protect your assets.

First, don’t lose money. “I’m going to lock in as much debt as I can. I’m at least confident of that cost because I can fix it. I can’t fix the cost of appliances, paint, and lumber,” but you can fix your cost of debt. That’s something you can do if inflation does rage for years which I don’t think that’s going to happen, but some people are predicting that. Your debt is at least fixed.

The woke movement is something that has many detractors. One of the things that you hear about the woke movement is wokesters can’t see past the end of their own nose. Neither can anybody else. Every human being is selfish and has a perspective of one. As worldly as you try to be, you can’t be. We all have to take care of ourselves. It’s the reason when the mask drops on the airplane. They tell you to put on your face first because you can’t help somebody else if you’re dead. Self-preservation is real.

The point I’m driving with that is this, in my life, what I use is my experience. I bought my first house. I built it and I was 25 years old, but the debt at the time was 8.5% on a first trust or mortgage, and my second trust was 10.5% or 12.5%. It was something ridiculous. I wasn’t buying houses yet in the late ’70s, early ’80s when debt was 17%, 18%, high numbers, but now I looked at this and I said, “The market is giving me interest rates at under 4% on investment-grade houses, which it’s almost 1/3 the real numbers from what I saw many years ago.”

Will it get better? Maybe. Will it get worse? I don’t know, but the point is it’s 1/3 as expensive as it was to have a primary house. This is not a primary house. This is a good time on the macro to make a move. I explain it that crudely for this reason. If you don’t understand real estate, what do you understand and where can you look at things and say, “This makes sense to do it.”

For a group of real estate people to be sitting around worrying about inflation, to me, is absurd. There are lots of things to worry about. I would worry about a recession, people not finding jobs, incomes dropping, and a financial crisis where no one’s lending for rational reasons. Worrying about inflation when you’re an owner of assets, to me, is ignorant.

 

“What do you mean what are we doing about inflation?” We should be buying more real estate. That’s what we should be doing, doing it as soon as humanly possible while the interest rates are still ridiculously low. I don’t understand the concept of why you would have that many people worried about it.

If you made me four things I’m worried about, I’m more worried about Ukraine getting invaded by Russia than I am in inflation because that could denigrate into war. That can turn into something that can fuck with not only the people who were involved.

Global markets, jobs, the economy, and everything.

It has ripples because of the psychological impact for those of us not physically being attacked with tanks. To that end, I’m worried about that more because I’ve hedged already here. This is a joke for Ian and me, but it’s something that we say all the time. The two pieces of advice I give interns are, “Don’t get fat because it’s hard to get on fat and buy hard assets.” Interns are usually 20, 21 years old. Buying hard assets allows you to have security into the future. Right now, gold has gone through the roof, so too has real estate. They’re hard assets, things you can physically own.

All I’ve learned in years of working and investing is when it gets to the front page, you should do the opposite. I’ve learned that over and over, the hard lessons. I’ve chased Feds. I would consider you a deep domain expert when it comes to residential real estate. I’m qualified to talk about industrial real estate because I get calls from realtors on a daily basis offering me drooling offers on my deals right now because people want the product that I own. I’m well equipped to tell you my opinion of how industrial is doing right now.

We’ll use Bitcoin as a good example. When you get random people that don’t have any money telling you that you should buy a certain coin or crypto, it’s probably in trouble. Now, it’s already passed but take the stock market. If you turn on CNBC, you’ll get pundits coming on left and right saying, “We’re buying an energy.” It’s like, “That just ran 50%, 60% and now that’s the advice you’re giving?” We’re looking to get out of the big techs and it’s like, “That move has already happened.”

Buying hard assets allows you to have security into the future. Right now, gold has gone through the roof. So too has real estate. Click To Tweet

To me, when I start seeing a bunch of common advice like that, and I see a company like Google that generates billions of dollars of free cashflow every quarter and it’s still growing 30%, 35% a year, this is several years after it was founded and it’s down 15%, 20% and everyone’s not liking Google all of a sudden, where if you project their cash in the next five years, they’re going to have more money than the top twenty non-FANG companies.

I look at that and I go buy brands when they go on sale. Amazon is way off its peak. This is funny. Airbnb, I love that brand. It’s growing like crazy. Frank was on this brand way before I was. You were an early adopter with Airbnb, but the strongest brand in the world. It’s a reopening play over the next ten years. It went public a couple of years ago.

My buddy works at UBS and he sends me a report because he knows I own a ton of Airbnb. This is after Airbnb went from $210 to $140. It dropped 50% in value. That is when this analyst came out and said, “We’re changing from bullish to neutral. We have a sell.” “It dropped 50%. Now you put that out to cover your ass?” He sent it to me and he said, “I know what you’re going to say.” I wrote, “Let’s buy.” I started buying because I’m like, “Assholes do that.”

It goes from $140. It just released results, and it’s like $187. By the time we put this episode out, I will be able to share with you Danny, sending me a release saying that they’ve upgraded the stock, now that it ran 30% again. Whenever anything is a popular sentiment, you should do the opposite. For me, I’m watching you still gobbling up real estate. You’re doing a great job. Keep doing what you’re doing because people are worried about real estate. It’s a good time for you.

I’m going to tell you a funny story. This will be my close. Super Bowl was on a Sunday. We’re a few peaks. We’re at peak crypto. They had several ads. I did a whole thing with my team after the Super Bowl and we talked about it. The Super Bowl is a reflection of two things, society and the economy. American companies are very smart. They go after the things that make a lot of sense, “What does society want to see, hear, and feel?”

To me, it was peak crypto. I thought it was peak electric. Electric vehicles are coming. The Super Bowl told you that, but I don’t care about either of those on the macro because that’s not my world, but I do think it’s also peak housing. The reason it’s peak housing, there was a commercial where Barbie was making fun of how hard it is to buy a house. I don’t know if you saw that commercial.

 

I played that twice for my company. I said, “These are the go-go days of real estate. If Barbie is on a television ad that in 30 seconds cost $7 million talking about how hard it is to buy real estate, it’s not going to be that hard much longer because we’re at the peak.” What we need to do is capitalize now because of these things. We have the wind at our back, and it won’t be like this forever. Peaks don’t immediately become troughs, but what you notice with peaks is there are a handful of peaks and then there’s an event that causes it to come down. If you look at a long-term chart, you’re like, “That certainly was a peak, but that to me, you have to pay attention to.

We quote Warren Buffett a lot and there’s a reason because he’s done it for so long. I’m his camp of, “It’s never been a bad time to invest in America if you’re a long-time holder.” All these things come down to, “Are you looking to get rich in a year? Are you looking to make money in six months in two years? Do you buy things with the intent to hold for 7 to 10 years?”

If you’re buying for 7 to 10 years, you want to buy assets that are going to produce unbelievable cashflow over that time in desirable neighborhoods and markets. That’s why I bring up companies like Amazon, Google, and Microsoft. To me, if I’m going to hold those kinds of companies for 7 to 10 years, they’re going to do great. If I’m going to buy, I want to buy in areas of Richmond where all the nice restaurants are popping up and everything’s coming.

I’ll leave you one last example on inflation. One of my properties in Savannah is a fifteen-year lease. My tenant is H&E Rentals. They’re a publicly-traded company. They have good financials and are a great company. The only thing that could happen to me in that is they go bankrupt. That’s the way my lease falls apart, but the lease is structured. Every year, my increase in rent is tied to CPI.

CPI is hitting about 7.5% now. I get an annual rent out of that building for $143,000. It’s going to go up to $153,000 this 2022. From an inflation perspective, that asset is growing along with other prices that are going. My income goes up. That’s an example of a good cashflowing business. It’s a piece of real estate, but I have an LLC around it. Frank has probably his own business and I can expense things towards it, but it’s the same with your residential real estate and stocks. “What cashflow does not debt up to the eyeballs?” As long as it cashflows in any market, you’re going to make money.

If you’re reading this and you’re not invested, what’s the advice? The first piece of advice is this is just opinion.

Being proactive and getting involved is your hedge against inflation. Click To Tweet

That shows how good we are with the legal that Frank’s disclosure is, “There’s probably some legal disclosure. You should look up somewhere for this.”

We should put that in here. The point of it is this. If you’re not participating, participate. I relate it to this all the time to people I believe life is a carousel. If your financial life is a carousel, especially around real estate, you’re watching the carousel if you rent and you’re on the carousel if you own. That’s the easiest place to start because everybody needs shelter and a place to go. That’s the change. Most of what we do is positively received, but not all of it. Someone was like, “I can’t believe you’re gentrifying these neighborhoods. It’s making things unaffordable.” I’m like, “It’s affordable for people who buy. It’s not affordable for people who rent.”

You don’t make the market. You serve it. The market wants something and you serve it.

At its simplest form, if you’re paying $1,400 a month in rent, you can probably buy a house in that neighborhood, own it, and trade up.

Without much of a down payment with low-interest rates, you’ve never seen it. Go out and talk to someone or a lender.

Being proactive and getting involved is your hedge against inflation. For my first bonus check, I bought NVR stock with it. I spent $150 that I blew on something and I put the other $1,500 in the stock market. It turned into something. I used to work at the Outback Steakhouse. I bought stock with it. Not with a lot of money, but it turned into a couple of thousand dollars.

 

Be active and get involved. You’re not always going to be right and time the market, but if you buy good things, what happens is while you’re asleep, the market will go up in a lot of instances. Sometimes it comes down, but a lot of instances, it goes up, you look up, and you’re like, “That thing I get in the mail or gets emailed to me, statement, shit, that’s worth more,” because I was smart to pick something good and strong that age well over time.

Great conversation on inflation. I’m very excited about another episode that we made that we are not qualified to talk about. There’s a legal disclaimer somewhere. When we get to episode 1,500 like Joe Rogan, this is probably one of the ones we’re going to have to go back and delete like he had to take 70 episodes out and delete them. This might be one that someone calls us out when we’re worth $100 million in our shot.

All right, Ian.

See you.