The Inflation Interest Rate Paradox: Why You Must Continuously Invest

Don't fight inflation. It will beat you with a stick. Ride inflation, so you can beat its ass instead. Investing is the key to long term wealth.

I'm afraid there are a lot of anti-real estate people out there who are missing a crucial economic paradox that will leave them in worse financial shape when they no longer have the ability or desire to work.

It's one thing to be against real estate because you can't afford it or don't know where you want to live for the next 10 years. It's OK to be against real estate if you've wisely invested in stocks, bonds, and other assets classes that have a history of going up over time.

However, it's not OK to be against real estate if you don't fully grasp the fundamentals or have never owned and therefore don't see both sides of the story. If you rent, you are short the real estate market. Nobody thinks shorting the S&P 500 forever is a good idea.

The Government And Their Economic Lies

The government likes to tell us there is little-to-no inflation. They point to the Consumer Price Index (CPI) hovering at 1-2% as proof inflation is under control. Yes, inflation has been coming down since the late 1980s, but you and I know the CPI or any other inflation index the government points to isn't telling the whole truth.

Inflation is running MUCH higher for everything we actually spend money on: medical care, college tuition, energy, food, and housing. Sure, oil prices have declined 50% from its peak, but gas prices are still 3X what they were in 1995. Don't you remember 90 cents a gallon? Apparently new vehicle prices have barely kept up with CPI. But when the median price of a car is now close to $34,000 according to KBB, something must be up!

See this latest price change chart for various consumer goods and services. Unless you plan not to go to college, not have kids, not get sick, not eat, and not live under a roof, you are feeling inflation at work. At least we can buy all the TVs, software, and toys we want!

Why I failed at early retirement

Hard To Trust Government Statistics

Given any adult who's been spending money for at least 10 years can easily compare prices then to where they are now, it stands to reason government inflation and economic figures can't be fully trusted.

So why does the government manufacture misleading economic figures? The desire for social and economic stability. The Federal Reserve's job is to maintain a target inflation rate of 2% and help ensure maximum employment. As long as the public thinks everything will be OK, there's a greater chance that everything will be OK. There won't be mass hysteria or a revolution as we've seen all throughout history. Remember, the #1 goal for all politicians is to stay relevant and powerful.

Imagine if the government reported the true inflation rate of say 6% per annum. Producers would raise prices more aggressively. Input costs for everything would go up. Interest rates would rise. Demand would eventually drop, the stock market would collapse, unemployment would skyrocket, and the economy would eventually come to a halt.

Drastic changes in the economy over a short period of time wreak havoc. Instead, the government and the Fed tries its best to minimize boom / bust cycles by reporting more innocuous figures.

Note: If you're wondering why the CPI can stay low despite everything that we spend money on goes up much faster than CPI, all you've got to do is adjust the weightings of the variables to determine CPI. For example, the government can overweight Clothing and TVs while underweighting Tuition and Medical Costs. 

How Are Consumers So Easily Confused?

After publishing Buy Real Estate As Young As You Possibly Can Possible, a reader disagreed with my truth after I just locked in a 2.375% 5/1 ARM. Here's what I wrote,

“Despite inflation, interest rates keep coming down. This is the goldilocks scenario for all real estate investors who get to take advantage of record low mortgage rates while also raising rents.”

His response, “No. Rates keeps coming down because inflation is nowhere to be seen. Rest assured if inflation ever revives, rates will rise too.”

This reader's response should be MUSIC to any government official's ears because the government has successfully convinced this person to believe there is no inflation.

Rent outpacing income and inflation

When you believe there is no inflation, you are much more amenable to paying $4+/gallon for gas, $41,000 for private school tuition, $25 for a t-shirt, $24,000 for an economy car, $12 for a salad and $3,600 for a one bedroom apartment without rioting. But just look at the national rent versus median income chart. It's obvious rent is outpacing median income growth.

Here's another comment I left on an ABC article on inflation, “Interest rates will only rise if the Demand for money rises. Demand for money rises when there is an acceleration in the global economy. Guess what happens in such a scenario? The value of your house also inflates at an accelerated pace as well.”

And this was one person's response, “Interest rates rise when central banks raise interest rates. Demand has almost nothing to do with it.”

Demand has almost nothing to do with it? My head is hurting. The general public has no idea what they are talking about when it comes to economics and finance.

Rich central bankers raise their interbank lending rates to fight inflation and reduce the demand for money. Demand has everything to do with interest rates and inflation.

The Market Determines Mortgage Rates

The market largely determines mortgage interest rates, not the Federal Reserve. The Federal Reserve controls the Fed Funds rate, which is the shortest end of the rate curve. Mortgage rates are determined by the bond market and the 10-year bond yield.

For a deeper understanding of how the Fed can raise the Fed Funds rate, yet mortgages can still come down, please read: Should I Buy A Home In A Rising Interest Rate Environment? Explaining The Fed

Let's say you are STILL unconvinced there is inflation. Look at my chart again and focus only on the Cost To Rent and Cost To Own columns for a house I own in San Francisco.

Rent Cost versus Ownership Mortgage Cost
Rent has risen from $5,500 in 2005 to $9,000 in 2016. Seems like a huge jump, but it's only a 4.85% increase a year.

The putative cost to rent has gone from $5,500 to $9,000 today, an 81% increase in 11 years. Meanwhile, the cost to own has fallen from $4,800 to $3,000, a 38% decline during the same period due to mortgage refinancing as interest rates declined. What a paradox!

Despite an 81% rise in rent, why does this reader still believe there is no inflation? I refuse to believe he can't read the chart. Therefore, the only likely reason for disbelief is due to the seemingly silent but powerful effect of compound inflation.

To get from $5,500 to $9,000 a month in rent in 11 years only requires 4.85% compound annual growth. But you can see how just a 2-3% difference above stated CPI can lead to huge numbers over time.

Long-Term Holding Is Key

Compound annual growth is why saving early and investing often is important. It is why having an appropriate asset allocation to match your risk tolerance is also extremely important. Compound annual growth is why paying expensive fees or having revolving credit card debt can really hurt your retirement goals.

And compound annual growth is why younger readers are almost always the ones who object to my wealth target charts because they haven't invested long enough to see compounding in action!

If the cost to own stayed flat while rents kept increasing 4.85% a year, that would be good enough for most homeowners and landlords. However, over the past 35 years, every single homeowner with at least 20% equity in their homes has been eligible to refinance and reduce their mortgage interest costs by 30%+.

Once the mortgage is paid off by 2025, the rent for this home will likely be over $10,000 a month and $8,000 after expenses into perpetuity. This is a valuable asset class that should continue to get more valuable thanks to inflation.

Be Flexible In Thought

You can highlight how people who bought at the very top of the market in XYZ city are still underwater to help justify your reason to rent. You can say that homeownership restricts your freedom to be a vagabond job hopper.

Further, you might even convince yourself that you always “save the difference” by investing in can't lose investments. Just know that shorting inflation by renting is a losing proposition long term.

There are actually people who bought equities at the top of the market and sold at the bottom too you know.

Do not be in denial.

San Francisco Bay Area Rental Inflation

Heads You Win, Tails You Win

If you want to gain wealth become a price dictator, not a price taker. Here are three scenarios where a real asset owner wins:

1) Let's say there really is no inflation as the government and the reader says. Take advantage of low interest rates and refinance your mortgage to lower your cost, especially since mortgage rates are at all-time lows in 2020 and beyond. I recommend Credible, the best mortgage lending marketplace where pre-qualified lenders compete for your business. It's free and easy to get a real quote. Or, consider taking on cheap debt to invest or grow a business.

2) Let's say inflation is growing at a fast rate. You can now raise rents an equal or greater amount on your rentals while making the same mortgage payment.

3) Let's say there's hyperinflation. Wonderful! Your real asset is hyper-inflating as well because it is part of what defines inflation. Rent is also rising like crazy. You can't refinance because rates are higher, but at least your monthly mortgage payment still stays the same.

Related: Why Low Interest Rates Are Probably Here Forever

Defending Yourself In A Downturn

What about during downturns? Well of course your asset will deflate in value just like everything else. So are you really hurting since everything is relative? In a downturn, interest rates decline because investors seek the safety of bonds, allowing you to refinance. But rents are generally sticky on the way down due to one year leases and the pain of moving.

You can believe all you want that getting neutral inflation by owning your own property is a bad financial move. But there is a reason the median net worth of homeowners is 31 – 46 times greater than the median net worth of renters according to the Federal Reserve Survey Of Consumer Finances. Inflation is too powerful a force to combat.

Just don't be a mad gambler and tie up 80%+ of your net worth in your home like the median homeowner does. Build out your net worth with multiple asset classes.

Don't Need To Be A Genius

Thanks to inflation, you don't need to be a real estate investing genius to do well over the long term. We will go through down-cycles. There will always be people who bought too much house at the top of the market or couldn't hold on during a downturn. But for those who do buy within their means at an appropriate time, things will probably turn out just fine.

This exact same argument can be applied to investing in the stock market. It's foolish to bash one investment class over another because it all depends on where you are in life, your goals, and your current financial situation. I so happen to place a large premium on living in a home where I now spend 10 – 15 hours each day.

Eventually, the US and other developing nations might turn into Japan, where interest rates go negative and more asset prices fall beyond just electronics and apparel. But today is not that day because the U.S. demographic is younger, we are more productive, and we have a hire and fire culture that allows for more rapid innovation.

Investment Recommendation

If you don't have the downpayment to buy a property, don't want to deal with the hassle of managing real estate, or don't want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.

Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible.

For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you're looking for strictly investing income returns. Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It's free to look.

Fundrise Due Diligence Funnel
Less than 5% of the real estate deals shown gets through the Fundrise funnel

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About The Author

137 thoughts on “The Inflation Interest Rate Paradox: Why You Must Continuously Invest”

  1. Real estate does a great job of keeping up with inflation and it’s one of the key aspects I appreciate about owning my own home. But looking at the Case-Shiller house price index, it looks like real estate doesn’t strongly outpace inflation. In contrast, it only beats it by a percent or so on average across the whole nation. Yes, some big cities have seen a lot of appreciation in the past several years but plenty of other places haven’t seen much real growth.

    My own house in Raleigh NC, for example, stayed roughly flat in value from 2003 when I bought it till 2014 or so (meaning small losses in real terms) but it’s gone up double digit % since 2014. That’s more the neighborhood than the overall city due to gentrification. Real estate is such a small portion of my net worth that it doesn’t really matter whether I’m beating inflation big time or just staying even, but I wouldn’t want to rely solely on capital appreciation of real estate to bring me riches. Unless I happened to pick the right market in hindsight (like SF!).

    1. Ah, but the right markets aren’t just SF! They are and have been:

      Colorado Springs
      San Diego
      Laguna Beach
      Newport Beach
      Maybe even Miami and Vegas despite their massive busts!

      And then we can go on to see what’s happened in HK, Singapore, London, Paris, etc.

      It goes back to the post: Follow The Money: A Look At The Best Paying Government Jobs. Got to identify big trends to make money. Maybe Raleigh has something up its sleeve!

      1. A lot of those places have a much higher cost of living in general too though. Your house goes up in value (which doesn’t provide you with any form of income, unless you rent out some of the rooms), but you’re also paying more on products and services while you live there. I lived in Newport Beach and the cost of restaurants vs the Inland Empire is night and day. Even stuff like gas was much higher.

        I’m with Justin and if I had a million bucks, I’d be buying in a LCOL area and putting the rest in productive assets that tend to be eat inflation like stocks.

        To live in Newport Beach or Boston or SF, you most likely have to leverage yourself and probably work longer to keep up with the higher expenses. That’s not a risk I’m excited about taking, but certainly many people do.

          1. No, I’m not particularly happy living in California (at least not without experiencing somewhere other than California before settling down), whether that’s Inland Empire, Orange County, or Ventura County (where I went to college), and that’s why I sold my real estate here after it increased 50% in 5 years….I don’t want to be tied down to this place. You pay a huge weather tax to live in California, and maybe that makes sense if you have a family and spent most of your time at home, I don’t know.

            My immediate financial goal (six months) is to quit my job and travel indefinitely and living close to work rather than commuting in from the beach the past few years is something that enabled me to greatly speed up that timeline by plowing more into investments.

            If real estate prices go back to where they were in 2010, then I’d probably buy again. If they never go down, there’s a lot of fun new places to explore. :)

            1. This is great that you are financially independent by age 30. Can you share with us how you were able to afford your place so soon after college? And are most of your peers like you as well? I have a strong thesis that a lot of people are much wealthier than the media makes them out to be. You being able to leave work in six months is another great example. Was there any parental help at all? Thanks

            2. I like to describe what I’m doing as taking a calculated career break and I entirely expect to re-enter the work force within the next couple of years. Unless i’m wildly successful in my freelancing attempts during my “year off”. This is expected to be a sort of gap year though.

              I definitely had some help from my parents in that they paid for my college degree and let me live at home for free until I bought my own place. I also had some hook-ups in landing my first job which turned into my career so far. I’m very lucky and I don’t expect most people to share my story. I made the most out of what I was given though. I have enough to take a break for a little while. But I don’t have enough for forever.

              Peers? I see a lot of people drop $100 at the bar on a typical Wednesday. Don’t know if that’s cause they have badass incomes or just like to live on credit.

            3. Thanks for sharing those links. Those are definitely some interesting reads. I don’t personally plan on an inheritance when doing my own planning, but something fairly extreme (several years of assisted living, for example) would have to happen for me not to receive something. I do wonder if knowing that might have a subconscious effect even though I tell myself it doesn’t. I’m still not going to drop $100 at the bar though.

  2. Hi Sam, thanks for the quick and detailed reply. Very appreciated and I’m learning alot on your site. I am new at investing and financial planning. I’ve been doing it just for a few years now and trying to take control of my money.

    So when there was the crash in 08-09 I didn’t have any money invested. But I saw all the headlines. Started to put money into ETFs the past few years, mainly in S&P 500 and some dividend paying stuff.

    It’s easy to feel good when the markets have been up these years, long term I am sure there will be big corrections.

    My portfolio is much smaller, I do hope with proper saving and planning I can enjoy in 15-20 years what you have done.

    1. If you didn’t have any money in 2008-2009 to invest, then one of the greatest things you must protect yourself against is thinking you are an investing genius. It’s very hard to know your true risk tolerance if all you’ve been doing is investing in a bull market. Definitely read: Investment Strategies For Retirement and Recommended Net Worth Allocation By Age.

      You might as well read for motivation and guidance, The Average Net Worth For The Above Average Person.

      After 10+ years of consistent saving/investing, you will be amazed at how much you can accumulate!

  3. Hey Sam, when you first started this blog and the stock markets were crumbling did you end up selling your portfolio to get out and buy other holdings or did you ride the downswing until now?

    Many who took a big hit in 08-09 and bailed out lost the gains in the next few years.

    What time frame did it take for your portfolio to get back to even and what % of it was in stocks vs real estate then?

    Perhaps do a post on going through a declining/bear market, as most people let their emotions take over and want to sell asap.

    1. Hi Joe – I just kept my head down at work to avoid being a casualty (we went through around 6-7 rounds of layoffs in 2008 and 2009 each year), continued to max out my 401k, and only invested about 20% of my after tax after 401k money in the market.

      I was honestly too worried to invest more b/c I made an ill timed vacation property purchase recently, and my career was levered into the market. Seeing many of your colleagues and friends get laid off was very disconcerting. Very.

      The largest lump sum financial move I made was investing $200,000 in a 5-year CD at 4% in one bank, and $200,000 in a 5-year CD at another bank that also provided a 4% interest rate. My rational was that the FDIC insurance was $250K per account, and I would give my $200,000 a chance to grow past the $250,000 limit. And hopefully by the time it did, the world would still be left standing.

      Back then, Washington Mutual got gobbled up and several other banks failed.

      But the biggest financial and life move was starting Financial Samurai in July 2009. This move completely changed my life and the rest of my life for the better given this site, along w/ a severance allowed me to leave Corporate America in 2012, six years earlier than I expected (age 34 instead of age 40). I do hope everybody at least start their own website to build their brand online.

      My existing portfolios got back to even before the crisis by mid-to-late 2012. How about you? How long have you been investing and where are you on your financial independence journey?

  4. Dude, you should write a book. I just purchased my very first home at 24 in MD. I can’t lie that I have questioned my move going from renting to owninh, but i must say you made me see the light in the tunnel. Do you have a blog, Instagram, Facebook, or articles i can follow? Thanks again

  5. NY Real estate investor guy

    On-point post on inflation as usual Sam. The economic “recovery” has been asset-inflation based, not based on businesses fundamentals and creation of quality jobs. The P/E ratios of stocks and the cap rates on real estate are much higher and lower respectively. If a stock is trading at double the share price, the company should be earning twice as much, which is hardly the case. Cash flowing properties used to trade at 10x net income, now it’s 20x or even 30x in NYC. A lot of this asset inflation is based on investor’s lower cost of capital. Having the Fed keep low interest rates for long periods of time due to “low inflation based on CPI” really pushes the value or real estate and stocks. (making rich people richer basically) Who knows what will happen when interest rates normalize or maybe even get to double digits like 20 – 30 years ago? (probably financial armageddon).

    Owning real estate in a gateway city such as SF is a great long term investment, both fundamentally (high barrier of entry, scarcity of land available for development) and it’s on steroids with these low interest rates. I assume European countries and Japan know that having ultra low rates will at least push up asset prices, in light of having no other options for real economic growth.

    Have you considered investing in multi-family? I’m of the belief that there can be more upside and less downside risk in a multi versus a single family home or condo. If you’re dependent on one tenant and that person moves you have 100 percent vacancy, compared to having no huge loss if one of your multifamily tenants moves out. The exit can be more lucrative as well, since there seems to be many buyers, both individual and institutional, who pay top dollar for multifamily because of its stability and long term upside (due to gradual rent appreciation with inlflation). This inflation and low interest holy grail environment also makes it harder for many first time homeowners to buy–they get almost no interest on risk-free cash savings, and the prices of homes/condos in major cities is very high.

    1. I’ve considered multi-family, and I wrote about it here: What Type Of Investment Property Should I Buy? SFH, Condo, or Multi-Unit?

      I kind of regretted buying a house when I could have bought a 2 or 4 unit building for more cash flow. Now, I’m SO HAPPY I did not b/c I don’t want to be a landlord to so many people. I’ve rented out my house now for two years and 3 months with no vacancy so far. I just want to deal w/ one set of tenants, one oven, one fridge, one electrical main etc.

      If I was 25-35, I probably wouldn’t mind managing 1-3 more properties. But at almost 40, I have ZERO desire to add on to my landlord duties. Two rentals + a vacation property rental is enough.

      I definitely want this goldilocks scenario of rising rents and decreasing interest rates to continue. I believe mortgage rates will stay low for years, if not another decade or two, while rents will just march higher little by little.

    2. To NY investor -your comment “I’m of the belief that there can be more upside and less downside risk in a multi versus a single family home or condo” – just a few things to consider… We own a single family rental, duplex and multi-family (two 4 unit buildings). We’ve had the same tenant in the single family for 21 years – that’s zero vacancy in 252 months. We’ve had the same two tenants in the duplex for 4 years too, but we have 3 new tenants moving into the multi-plex this month.
      You can still have big losses in multi-family units. We had a tenant move out (well, we ended his lease) – and it cost us over $5,000 to do basic repairs in an 850 sf apartment and it took 2 months to do it. Yes we were still getting rent from the other 7 units, but we haven’t spent $5000 on our SFH in the last 10 years. The SFH and duplex are as passive as real estate can get at this point (since we manage them ourselves) and we consider them not to be a risk at all. There are many people who want to rent SF homes in our area. And the folks in the duplex asked for a 3 year extension recently. 7 of our 8 multi-unit apartments have turned over in the 4 years we have owned them (a few have turned over each year). Raising the rents doesn’t always cover the costs of general maintenance and the wear and tear of tenants coming and going so often (carpets, etc.).
      Lots of things to consider – and Sam is definitely right about managing more tenants and the work involved. We chose that work for this time in our lives but we’ll be handing it off to others (partially) in the next year too.

      1. NY Real estate investor guy

        Hi Vicki,

        Thanks for the insightful reply. I guess every market is unique and although I’m by no means an expert on the SF market, I do know that it’s been a very strong market for a long time. Almost everyone I know who’s been there raves about the perfect weather and lifestyle over there. The demand coupled with the outrageous price of single family homes and high paying jobs creates a situation where i could see many people being happy to rent a single family home for a long time. In that respect, owning a single family as an investment makes a lot of sense. We all go by personal experience as well-I’ve known several people making the transition to downsizing to smaller residences where they tried to keep their first home and had a very difficult time finding renters (here in the NYC area suburbs) and deciding to just sell.

        I own some smaller multifamily and do agree that it’s definitely not a hands-off, hassle-free investment. I do have turnover, but a able to market the vacant units and get new renters in pretty quickly (worst case, 1 or 2 months vacancy for me). Especially with the older buildings, there’s a lot of maintenance involved and that could eat into cash flow, and you need a large enough rent roll to hire a property manager to do some of the work in order to have a life.

        I think the price we buy in at, and the amount of leverage used is also key. If one were to put down a standard 25 to 30 percent, the rent would have to cover the mortgage with some cash flow left over. I think that the high prices of all kinds of income producing RE in both SF and NYC would require a heft down payment in excess of 30% nowadays in order to make sure you break even in the even of a downturn or large sudden vacancies. In this scenario, a multifamily to me, would be a safer bet since the probability of zero percent vacancy is unlikely compared to a single family home.

  6. “Despite inflation, interest rates keep coming down. This is the goldilocks scenario for all real estate investors who get to take advantage of record low mortgage rates while also raising rents.”

    His response, “No. Rates keeps coming down because inflation is nowhere to be seen. Rest assured if inflation ever revives, rates will rise too.”

    Hey Sam,

    I think one point that you somewhat miss is that sure mortgage rates are going down to very cheap levels but if a person makes 100k and can afford ~30% for housing they will now be able to afford a larger monthly payment on their house (in terms of what goes to principle since lower mortgage rates mean a smaller portion goes to interest payments). This has driven up the prices of houses because you can now afford more house with the same dollars (kind of – though theoretically all houses should move up so perhaps it’s a non factor). So now house prices have gone up (government wins here because they can charge you more in property taxes!) but what happens when interest rates eventually go up (if they ever even can – and it may be a while but it will happen eventually).

    My take is the market is screwed up. As rates rise all of the people who locked in at low rates are set. Everyone else will now have to pay more in mortgage interest payments and this will mean less in principle… so I foresee some amount of deflation in housing from this effect. Personally, I love real estate and agree with most you said above and I’ll continue to keep buying apartment complex’s even with these “inflated” values that I think we have. As long as the ROI is there what do I care? Plus when deflation comes I can then get my properties reappraised and pay lower property taxes (again increasing my ROI). That doesn’t even include the trends all pointing towards rents going up at insane rates (as you referenced). I like to follow supply and demand and basic trends too. Millennials are renters primarily (I’m one and that’s what all the friends do), they don’t mind spending a lot on their place (hurting savings rates for down payments long term). This means I am a price setter and they will have to be a price taker due to limited means of a 20% down payment on properties they are accustomed to living in from high rents while they lived it up!

    So recap, buy all you can now if the ROI is there and you foresee stability. If you are buying and holding price doesn’t matter as much (though still try to get the best prices – but I mean you don’t need to wait 5 years to time the market – get that ROI now!). Right now my complex is paid off with returns just under 20%. My parents have mortgages on their complex and are making 50%+. So timing the market is a moot point when you can make your money back in under 2 years… And other points be prepared to for some eventual deflation! And BUY BUY BUY!

    Common denominator of all 1%ers is they all have equity. Get equity in property, stocks, etc. Just do your research to make good, educated, risk calculated decisions for the ROI you’re eyeing. Looking forward to seeing you all in the 1% (except no one will know because of good old stealth wealth ;) ). Cheers!

    As always good read Sam.

    1. Price setter… I prefer the term, Price Dictator! More powerful! You know, like saying, “Here’s the price. Take it and like it.” But maybe that’s just the writer in me.

      I’m not following your analysis of my interaction with the reader in the post. But that’s cool.

      Well done paying off your Complex as a Millennial! How did you start, where do you live, and how did you do so so quickly? What created your mindset to be a Price Dictator versus a Price Taker as all your friends are?

      1. I like your thinking there! Price Dictator surely is more powerful haha!

        I’m just trying to say: cheap interest rates drives the price of the asset (property in this case up). So when interest rates do go up you’ll see the property values go down because people won’t be able to afford more. They will stay make ~ the same money but now more money will have to go for interest and less for principle payments. This will translate to less buying power on new properties. However, if all properties go down you’ll still probably be able to afford the exact same house you could previously afford just more money goes to interest and less to principle but your mortgage value would be less.

        I started saving in HS, undergrad, and grad school and wrote the check to buy it outright. I live in New Mexico. I work in engineering and make a solid 6 figure compensation package in my early 20s.

        I see the economy and see how rents are going up. The trends show millennials aren’t purchasing houses and are renters. If they are renters and rents continue to go up, it would be foolish for me to not take their money! Why should someone I don’t know profit off of them when I’m just as capable of profiting myself :D?

  7. Great opening line. I feel inflation all the time. It’s funny one of the things in your list is $25 t-shirts. That’s one of the reasons I hate buying clothes lol. Here’s to riding inflation and beating its ass!

  8. Heavily regulated and subsidized industries have the greatest price increases and TVs cost less than ever?

    It seems like there might be a lesson in there somewhere…

  9. Sam,

    Like your post. I am wondering if you can think of a way to invest in the average rent – so if the average rent increases 5%, so should my investment. I cannot think of any way unless CME starts a futures contract on that.

    Separately, how do you think of investing in tuition? There are 529 plans that allow people to prepay tuition. Do you have thoughts on these as investment vehicles?

    1. I’m sure there is a structured product out there, but I don’t know it. You can invest in tuition by investing in publicly traded for profit evil schools like Phoenix Online.

      And you can invest in rising rents through physical rental property, real estate crowdsourcing, or REITs. The key is to have some exposure to inflating assets. Whatever exactly you choose is based on your risk tolerance and comfort level.

  10. Datapoint – was in a 2/2 apartment in walnut creek(40 mins from SF) – in 1999 my rent was going to 1700 a month.

    Now in a 2/2 apartment in walnut creek – rent 2190.

    Keep hearing how hot rents are in the area but I’m not overawed by that increase.

    For the intervening years – 1999 to mid 2016 i owned a townhouse also in walnut creek. Purchased for under 270k sold for about 610k. Think that beats the s&p 500 by a touch but I feel there’s a lot more risk in a particular house than the s&p. And given expenses and upgrades I’m pretty sure I’d have done better in the s&p 500.

    Renting from now on for me.

    1. Pretty cheap for a 2/2 in WC! Although it is kinda far away from SF, it’s not bad via BART. So that’s the thing. People who are complaining that the SF Bay Area is too expensive aren’t looking hard enough. Why not commute 45 min by BART to rent a 2/2 and save $1,200+/month in rent if that place really exists? We don’t all have to live walking distance to work, nor do we deserve to.

      Everything is relative. If you bought something in SF in 1999, it might have been a triple, not a double.

      1. All very true – but the fact that it might have been a triple is in the past. For me that makes it less likely in the future not more. Same with stocks or bonds I buy them when they’re down and unloved, not after they triple. Lately I’m much more interested in European equities than US.

        I’m in the same position as you though with the house proceeds, yields are in the dumps. Enjoy your website and hoping you find some good deals and share them.

        I greatly enjoyed the realty shares discussion but for that kind of money I’m much more interested in small slices of big reits than office buildings in PA. Made for good reading though.


  11. Sam,

    I have great respect for your work and success with Financial Samurai, but I feel you’ve missed the mark here.

    To state that the government “manufactures” inflation data that does not reflect its actual measurements of price increases is not only inaccurate but also irresponsible.

    It may be fair to take issue with the particulars of the CPI and other inflation measures’ inputs, assumptions and statistical adjustments. There is room for disagreement there, and the CPI formula is in fact periodically revised, reflecting that. You may also reasonably argue that the CPI basket of goods does not reflect your personal consumption pattern or experience. This is natural and to be expected.

    But to baselessly claim that the U.S. government maliciously manipulates its data to deceive people into being economically docile is beneath the quality of this blog’s normal standards. And it is beneath the standards expected by reasonable and informed readers.

    It reflects the sort of can’t-prove-the-negative conspiracy theorizing that pollutes the thinking and opinions of those without the care or tools to recognize how hollow the theorizing is. I think you may wish to rethink your position on this issue.

    I won’t address all the other concerns I have with this article, but there are quite a few, many of which relate to what I believe is an inaccurate treatment of the nexus between inflation and the regular workings of the economy.

    For instance, you state: “Imagine if the government reported the true inflation rate of say 6% per annum. Producers would raise prices more aggressively. Input costs for everything would go up.”

    But this statement has it all backwards.

    The CPI reflects observed price changes in the economy; reported changes in the CPI are not used by businesses to change their prices; businesses change prices in response to the profit-maximization problem they face; were businesses able to increase price and enjoy higher profits, they would do so regardless of the CPI statistics (and they would balk at raising prices if doing so meant lower profits, regardless of the CPI). It does not follow that a CPI report showing 6% price increases would cause producers to raise prices 6%. It would instead simply indicate that producers already had raised prices, in the aggregate, by 6%.

    Again, Sam, I respect your work. It’s only because of that respect I’m bothering to respond to this. There are plenty of places on the internet where poorly considered financial discussion can be found. Financial Samurai is not one of them, and I offer these thoughts in the spirit of keeping it that way.

    Your bro,


    1. No problem! I love dissent. Dissent makes things much more interesting and fun.

      Maybe you can help address the paradox that I write about regarding rising inflation yet declining interest rates?

      I love how you use the words “maliciously manipulates,” it definitely takes it up a notch from what I wrote.

      How would you describe why CPI is so much lower than practically everything we care about spending money on?

      Also, are you affiliated in any way with the government or with producing such data?

      As a landlord, I am totally fine if the masses think that inflation is really only running at 1 to 2% a year. It makes raising rents much easier for me. But I really want to illustrate to those people who think that shorting inflation by hating on real estate or stocks or anything is not going to be optimal long term.

      I have spent a significant amount of time with senior government officials and senior monetary officials from various countries regarding inflation and economic policy. We’ve seen a lot of investors, we’ve had a lot of dinners, and we’ve had even more late-night heavy drinking sessions. People will be amazed at how they think and what is really going on behind the scenes.

      1. Thanks, Sam. I wouldn’t call it “dissent,” which implies your view is the mainstream perspective. I think that is not the case.

        To get to your questions: First, I have no affiliation with the government. But I have previously consulted with government entities, who were clients. Those engagements are no longer ongoing, and this discussion relates in no way to any of those projects.

        Second, there is no paradox. At its most basic, the price level can be thought of as that which “clears” the market for real goods (i.e., where aggregate demand and aggregate supply intersect for goods and services). This is measured, generally, in indices like CPI.

        The “risk-free” interest rate, however, “clears” the financial market, where demand and supply for government securities interact. Other interest rates tend to follow this market’s lead on the basis of differential risk profiles, duration, etc.

        As a corollary, what happens in the market for real goods in terms of market-clearing price does not relate directly to what happens in the market for financials. And vice versa.

        If aggregate demand for goods and services expands quickly relative to the increase in aggregate supply, one would anticipate high levels of price increase (i.e., high inflation). But this does not relate to what happens in financial markets directly, where interest rates are determined on the relative demand and supply of investment. In this market, there could be a simultaneous decline in aggregate demand for investment relative to aggregate supply of investment, thus driving market-clearing interest rates lower.

        So, again, there simply is no paradox. Price level changes can (and do) move independently of interest rate changes. This phenomenon is one reason the Fed seems sort of stuck right now.

        Sam, I think you’re taking a simple concept and making it seem very complex. And as a result I think you’re missing the boat, notwithstanding your claims to be in on the big secret talked about only at late-night heavy drinking sessions. Perhaps, Sam, your drinking was too heavy.

        1. I definitely think you are right and that I am often confused and wrong. Your comments do give me some comfort that there is no mystery or paradox. That everybody is logical and realizes the power of inflation and the power of owning and investing in real assets.

          This is good news for all of us who invest. Hopefully the mass media can do a better job in focusing on the positives and how everybody is doing well thanks to a bull market, rather than so poorly for whatever reason. Overtime, I’ve slowly stopped worrying about other people’s financial well-being because of comments like yours.

          I really think it is great that you are a strong believer in the government and the government figures. We need more people to believe in the government as it continues to become a bigger part of our lives.

          How long have you owned your property and what do you own? Can you share with us your mortgage interest-rate refinance history and the rent that your property rented out for in the past today and? Where are you located? We had some pretty good data points from other commenters about their property statistics from various regions so far.

        2. Hi FL,

          I work for the government in a department responsible for crunching the numbers. There’s truth to what Sam says. We want low inflation and low unemployment. We subjectively decide the weightings of CPI and other data to report “the best” data possible for the public to digest. I’ve often questioned our own data myself because it often jives very differently with reality.

          The government appreciates you believing all our numbers and taking what we say as absolute truths. However, the truth of the matter is that we are doing our best to gather as much data as possible to analyze and there are a lot of flaws. We do not want people thinking for themselves and looking under the covers.

          If more of the population were like you and listened to everything we had to say, it would make our jobs in controlling the public much easier.

          Carry on.

          1. Sam & Insidie,

            Thanks for your thoughts. I’ll agree to disagree here on several fronts.

            Insidie, I agree with the faults in various government statistics; however, it’s the idea that those statistics are being actively manipulated with a particular end in mind that I believe is incorrect.

            Sam, I’ll ignore the sarcasm. If you’d like, we can talk about it over a beer sometime. Your treat.

            This is less about belief in what the government says than it is in reasoned logic and a fair reading of economic history.

            Thanks for sharing these different views.

            1. FL, for the sake of adding value to the post and discussion given I’ve already agreed that you are right, can you provide some data points on where you live?

              How long have you owned your property and what do you own? Can you share with us your mortgage interest-rate refinance history and the rent that your property rented out for in the past today and? Where are you located?


  12. Boom. You hit the nail on the head, Sam. Great post! I’m always surprised by personal finance “experts” who decide that renting might be a better financial decision than buying.

    Renting short term while you’re in college or getting your life in order? Sure. But renting over the long term never, ever ends up being better than owning.

    1. Middle Class Millionaire

      There are definitely pros and cons of both renting & owning, and it certainly is dependent on your personal situation and financial goals.

      However I am 100% with you on owning though…. It is too good having a portion of every mortgage payment paying down your debt and increasing your equity, especially if at the same time your home is appreciating. Wealth is being created on autopilot just by owning. Renting is just spending money to get by… no other financial gain there.

    2. Sorry, Yeti, but this is factually not true. Try running a rigorous rent vs. buy calculator on a high CoL area and there are plenty of situations where renting is mathematically better forever.

      In my own town, the taxes are so high and there are so many condos on the market… that I pay less in rent than an identical condo pays in annual tax alone.

        1. Oak Park, IL… A near suburb of Chicago and home of famous architect Frank Lloyd Wright. Rechecking the numbers my claim is not literally true, but in 2011, a 2 bedroom condo selling for $380,000 that I was considering had a tax bill of $9,534. Instead, I went for a 2 bedroom in a 7-unit rental building where the whole building had been gut rehabbed by a developer (I was the second occupant.) I’ve been paying $950 a month since with no increases (I guess tenant retention is that critical?)

          So, I’ll take $11,400 a year in rent vs. all expenses + $9,534 a year in taxes. Project/inflate forever and you’ll never make up the gap in mortgage interest and expenses minus appreciation.

          I realize this isn’t that fair of a comparison, because I was looking to buy at the better end of the market and found a screaming deal on a high quality rental. (I could also buy a crappy 2 br condo for $150k/$4k in taxes.) But that is kind of the point. The pressures on the local market might be out of whack in your specific situation and favor renting.

          1. Cool. Thanks for the details.

            Can you see how much the $380,000 place you could have bought in 2011 is worth today and compare your rent savings with the profits if any?

            $950 is damn cheap for a 2/2! Pretty amazing they haven’t raised the rent all this time. Don’t let them see this post:

            I’ve had a number of people in SF tell me recently something like this, “I’ve enjoyed my rent controlled apartment all these years, but I should have bought instead.” And one buddy, who works for the city and who is finally leaving said, “Rent controlled apartment cannot rule your life!”

            Their point being, yes…. it’s a deal in the beginning, but give it a long enough time and inflation starts really making asset owners much wealthier.

            Let me know about that 2011 apartment’s value today!


      1. I live in a high CoL area (Orange County, CA) and owning still ends up being far, far cheaper than renting in the long run. I’m not saying that it’s cheaper year 1. But 20 years down the line, the owners always come out better, at least around here.

        I’m also curious about where you live, and the story with property taxes there, and your current rent situation. Is your rent below market for some reason? Logic would suggest that market rents have to be higher than the property taxes, or there would literally be no landlords.

        I will say that owning can be a complete money pit if someone overbuys on their house. It’s possible to buy and end up in the hole vs. renting if you buy more house than you should. But if you buy a reasonable house or rental property, you should absolutely be ahead of all the renters after 20-30 years.

  13. Sam,

    Great article. And agreed, real estate is win-win. But I thought CPI factored in things like college tuition and healthcare costs, no?


  14. “Unless you plan not to go to college, not have kids, not get sick, not eat, and not live under a roof, you are feeling inflation …”
    Haha, this is great.

    The chart of different prices 1996 – 2016 is very telling. The price of toys went down, while the price of the things we actually need went up, a lot.

    If the average comes out to 55%, maybe that means people are spending a large part of their budget on toys?

    1. Yes… toys, TVs, mobile phones every 1-2 years. I do like that electronics are so much cheaper now to help democratize access to information and communication. Hopefully people can then LEVERAGE the internet for something great. You know, like start their own site or work in the internet space. No brainer!

  15. Great article Sam! If the common man only knew about the Govt’s use of whimsical data points.Smoke and mirrors at its finest!

    Keep up the great work! You’re the best!

    1. Thanks Steve. Data is so easily manipulated to serve the purpose of the organization producing the data. Also one has to do is open their eyes and be more observant at the cost of goods and services versus what is reported by the government. I do give credit to the government for trying to do their best to maintain social order. If not, there will be more things like the Brexit that with the stabilize our tournament that will destabilize our economy. A stable economy means more profits to investors.

  16. Not believing in inflation outside of the CPI numbers is so strange. In the four years I was in college, the price went up $15000. Same thing for graduate school. Even if all a person does is spend money at the grocery store, those costs are up, too.

    The money costs of owning versus renting also plays out here. In my market, I live in a group house and we all throw in to rent that is over $3000 for a crappy little house that has not been maintained. If I bought my house and kicked out my roommates, my mortgage payment would be ~ $2300 with the added bonus of no longer having roommates.

    1. After about 25 years old, I couldn’t stand living with roommates anymore. I was asking myself, what the hell is the point of going to college and working so hard at my job to still Live with roommates has a 25-year-old. I wanted to get my own place so I was scripted saved for as much as I could.

      So I admire people in their late 20s and 30s and so forth continue to live with roommates to save money. I just couldn’t stand it anymore, and I couldn’t stand living above or below anybody anymore either due to the noise and the lack of freedom.

      So maybe that is it. The more agitated and annoyed you are, the more willing you are to change and do something about it. If you have a relatively easy job that requires only 40 hours a week of work with relatively decent colleagues, why bother? And if you are happy with living with roommates, why bother trying to save to buy a place?

  17. It’s so easy to see the effect of inflation just by observing how much more food costs! Grocery trips used to be fun for me but now I dread seeing what staple has risen in price from just a few months ago.

    Inflation is real and it can be a killer. Which is why I’m in the process of getting some rental properties while keeping up with equity investing. People who don’t invest, and there are many, will be in for a very rude awakening once they can’t do their day jobs anymore.

  18. No Nonsense Landlord

    Demand for money dictates interest rates, not the central banks… We are in the midst of a global wage equalization scheme. We are in deflation now, and will be for the foreseeable future. There are many under-employed people.

    Inflation is caused by too much money chasing too few goods. People do not have more money, although many goods are in short supply, like housing.

    Even if the minimum wages increases, that will just mean less people working. The total dollars spent in the economy will not increase.

  19. SF Rent Controlled Renter

    you often cite this across many of your real estate articles, but I often instantly think “correlation does not equal causation” with a like any good internetter.

    is there data to show owning causes/leads to higher NW VS higher NW causes/enables owning a home?

    “there is a reason the median net worth of homeowners is 31 – 46 times greater than the median net worth of renters according to the Federal Reserve Survey Of Consumer Finances”

    1. Congrats for getting a rent controlled apartment in SF! What is it that you do? I’m thinking of writing an article about those who make six figures who live in below market rate apartments that are under rent control. I’d like to know why they do so, and whether they think that exacerbates the housing affordability situation in SF and other expensive cities. I’ve already written a prelim post entitled: Immediate Solutions To A Housing Affordability Crisis.

      Could you share your background? Everything is anonymous anyway. Perhaps you have friends who make large incomes who also live in rent controlled apartments who’d like to share their reasons why when there are so many lower income folks who are getting pushed out?

      Here’s the PDF from the Federal Reserve study on renter versus homeowner net worth.

      Here’s the logic:

      * Inflation. Discussed in this post. Your $100,000 income might inflate by 2% a year, or $2,000. But your $500,000 home that inflates 2% a year is $10,000.
      * Leverage. 20% down and a 3% annual overall return is a 15% cash on cash return.
      * Forced savings. People think they can save and invest the difference, but often don’t.

      Finally, my good buddy of 10 years is leaving to LA. He texted me, “My life cannot be controlled by a rent controlled apartment any longer.” He says he’s finally going to take some risks with his gf and relocate. Thoughts on his quote?

    2. SF Rent Controlled Renter

      may be over-assuming myself, but I can’t help but think your soon-after-my-comment-got-approved tweet is somewhat related to my comment + commenter name :) if the related assumption is I make 6 figures (it’s correct, I do)

      “Doing a post on people who make six figures taking up rent controlled apartments. Anybody want to volunteer to share their story on why? Thx”

      I would prefer to stay anonymous but I can give brief insight into my situation because it’s pretty simple: I moved into a decent apt (when I made <6 figures) that a friend was vacating and referred me to because it was very convenient for our company's commute. it happened to be built before 1979 (as are most SF rental apts due to rare construction). I still live here because the arbitrary day of my w2 hitting 6 figures did not trigger a desire to:

      1) move apts (yuck such a pain as I like my apt. you often cite as a landlord appreciating stable renters who never cause trouble and always pay on time – that's me!)
      2) if I did move, seeking out a building constructed after 1979 as to not fall under rent control laws (I like my neighborhood and as is well documented, new construction is rare in many SF neighborhoods outside Soma/S Beach)
      3) buy (which is on topic for this article but to go to the top of the order — my rent is already controlled for inflation so why would I buy if the chief reason you cite for buying is to control for inflation)? to be fair, eventually I'll need more space for kids etc but the RE market in the Bay Area is simply too pricey to buy more than I need today and sit in a house with 3+ empty rooms. plus longterm I'm not sure the bay is where I want to raise kids for a number of reasons even though I love it here and all my friends are here.

      in checking the exact year rent controlled applied to I found this quote: "San Francisco’s rent control law covers most rental property in San Francisco. If you live in San Francisco, you are usually covered by rent control."

      rent controlled units are NOT below market rate (BMR) units that are specifically intended for low income workers. rent controlled units are simply the result of poorly conceived SF housing policy that intended to address your graphs but ultimately caused more harm than the good it intended (low financial incentive for people like me to move) and thus rapidly rising rents whenever an apt does change hands, on new construction, Ellis evictions, etc

      so to answer your tweet's question – I disagree with the implied language you used and don't believe I am "taking up" an RC unit. most of SF is RC. I happened to move into an apt (when I made <6 figures) and like most people in SF I just stayed. when I hit 6 figures, I did not suddenly think to myself, "self, I should move and seek out a rare post-1979 building in a neighborhood I like that is unlikely to be significantly better than my current one so I can pay rent that's keeping with the mass inflation Sam cites in his articles"… because that would not be rationale or in keeping with my personal finance goals that let me retire early like Sam did when he lived in that cheap apt when he first moved to SF :)

      from a purely personal finance point of view (which is funny because it is both consistent with some of your writing and counter to some of your writing), the savings I keep while in RC, invested smartly in equities, REITs, etc. are very much so outpacing non-SF-housing inflation and enabling me to one day follow your path into financial independence.

      in conclusion, unfortunately SF policy is broken and causes irrational behavior in the markets, but should that mean renters are expected to behave irrationally themselves in turn? I hope some of my points help your article and lead you write on poor housing policy vs an indictment on SF renters who are simply acting rationally within the game they are trapped in :)

      1. Great response! Thanks for participating. Too often I’m left with crickets after I spent time responding, which makes me question my use of time. But, as you can probably tell, I like the social aspect of having a blog. It’s fun.

        All your points are logical. The thinking is, “Why the hell should you move out of your rent controlled apartment, even if you’re making six figures since that helps your finances. The people who are making less than six figures can find somewhere else to live!”

        So my follow up question is: Should the SF government pass ANOTHER law that stipulates something like: Once you make over $200,000 in household income, you have 60 days to move out and find a non rent controlled apartment? Surely folks with such incomes can afford market rate apartments and can do good by letting those who earn less also benefit from RC?

        Everybody knows that Rent Control is great for landlords due to the artificial restriction of supply as nobody moves. But I don’t think RC is helping as many people as we think.

        All condos and single family homes are NOT under rent control in SF. Roughly 71% of RENTAL SUPPLY is RC. But less than 46% of TOTAL residential property is under rent control.

        See below

        San Francisco Mayor’s Office of Housing Report
        June 2014
        2014 CGJ Report Housing Under Pressure Challenged Preserve Diversity 7-7-14
        Page number 5
        Rent controlled units: 171,609 (72.4% of total rental units)
        Total Rental units: 237,000
        Ownership units: 139,000
        Total Housing Units: 376,000

        BTW, if you’ve been living in your property for at least two years, you are now paying below market rent as rent has been rising far greater than the allowable 1.6% – 2% a year under RC.

      2. SF Rent Controlled Renter

        funnily enough i wrote my lengthy self-reply based entirely on seeing your tweet and posted it before i saw your reply. luckily it addressed many of your comment’s questions, but your 2nd reply includes more interesting points to address.

        i’ll reply to points in both of your replies below for efficiency

        RE: “Thanks for participating. Too often I’m left with crickets after I spent time responding, which makes me question my use of time.”

        i’ll admit this may be the first internet comment thread i’ve actually gotten into despite reading your blog, many blogs, reddit, etc voraciously for years, but when i go in on something i go all in so…

        1) i appreciate your writing and 2) i disagree on some key philosophical assumptions and 3) i hope some of my points counterbalance your thesis, especially for your SF readership… so happy to add some healthy discourse :)

        RE: “What is it that you do?”

        i will err on keeping details mostly anonymous because the internet is a scary place when you offer an opinion and people know your identity.

        shocker! i work in tech :) but unlike what most anti-tech folks want to believe i started straight from undergrad and moved to the city making a very median-esque mid-5 figure salary that could not afford a new apt in the Avalon eating up 40-50% of my take-home pay. i know people that did – their savings rates and general spending habits were not in keeping with your ethos.

        RE: “Perhaps you have friends who make large incomes who also live in rent controlled apartments”

        i have many friends who make 6 figures and live in rent controlled apt’s for all the same reasons i cite in my other comment. again, most of my friends who moved to the city around the same time as me did so under similar conditions – early in career and not crushing it (yet). they, too, like your friend are golden handcuffed to their RC apt because to move would be to crush their savings, extend their commute immensely, and/or vacate the city. the funny thing is many people, myself included, just rented an apt not knowing anything about rent control – we just happened to find an apt that happened to be built pre-1979 (e.g. 7 out of 10 apts by your stats). i think i only learned about it a couple years in but once i did… LOCKED IN

        RE: “The people who are making less than six figures can find somewhere else to live!”

        your addendum to my logic is a sentiment i’d really encourage you to not hop on – it is all too common with the SF anti-tech movement to assume that relatively well-off individuals acting rationally in the current market are simultaneously taking a specific anti-less-than-6-figure-people stance. it’s so much more nuanced than that and turns it into an us vs them mentality (much like bipartisan politics), distracting from the real issue at the heart of this all: broken government and housing policy. SF is a hugely popular city as your posts often cite, but housing policy has broken the supply/demand curve by giving into NIMBYism (“protect my million dollar views” ;) and stifling new construction, housing density, etc. i could go on but look to examples like Tokyo where population and density have skyrocketed but rent prices have not:

        RE: “Should the SF government pass ANOTHER law that stipulates something like: Once you make over $200,000 in household income, you have 60 days to move out and find a non rent controlled apartment? Surely folks with such incomes can afford market rate apartments and can do good by letting those who earn less also benefit from RC?”

        ooo this is a very slippery slope. call me a libertarian, but passing more laws to even out existing broken laws is just asking to compound unintended consequences. like the funny stories of countries releasing a natural predator to take care of one pest, only to create a new pest and the need to release another natural predator, etc. etc.

        some initial brainstorming on your law:
        – who regulates this? am i submitting w2’s to my landlord annually and onus is on him to boot me, a trusted tenant who always pays on time? is the city watchdogging my w2’s and current apt status? i’ll go into this more but you’re talking about BMR and section 8 levels of regulation for massive numbers of units (70% of rental market) because you would have to do this paperwork for all 172k RC units BUT how many units would this actually affect/free up (aka how many people are >200k and in RC units)? is all that administrative work ROI positive to free up maybe a few hundred? a few thousand units? that does not solve the core problem and is a lot of government waste to regulate. thus the struggle with policy in general – it would make people feel good (kick out those 6 figure RCers!!!) but would it actually help SF housing vs investing all that time and effort into changing permit, zoning, and density laws so that tens/hundreds of thousands of units could come on the market and really make a difference for people at all levels of income
        – a much more minority case but interesting policy point would be – is it w2 income? does capital gains income count? if i’m a CEO of a company or retired and have $1 in salary but a ginormous net worth shedding $199,000 in dividend income… do i count?

        RE: “All condos and single family homes are NOT under rent control in SF. Roughly 71% of RENTAL supply is RC. But less than 46% of TOTAL residential property is under rent control.”

        to clarify, i don’t believe i said or implied ALL housing (rental + ownership markets) is under RC, but rather most of the rental market is (which is what we’re talking about here right – the rental market). by those numbers and depending on your definition of “most”, then i would still stand by my statement that 70% of the rental units equals “most”. that 30% is mostly post-1979 construction which, again, is heavily in Soma/S Beach and many people simply do not want to live there.

        if we’re talking about people who are renting, i do not think we can consider the number of ownership units – they are simply not in the consideration set for renters for the most part (either because they do not want to buy or cannot afford the $1.1M median price). so if we’re talking renters, then 7/10 places you could possibly move into are rent controlled and i bet if you go outside of Soma/S Beach that number jumps much higher and closer to 80-90%. as stated above, i (like many of my friends) didn’t intentionally set out to move into a rent controlled apts (had i know what RC was i might have though)… we just walked on the beach and found some sand :)

        RE: “BTW, if you’ve been living in your property for at least two years, you are now paying below market rent as rent has been rising far greater than the allowable 1.6% – 2% a year under RC”

        here is where i want to make my biggest point in reply to your tweets/reply and especially to your proposed law above with a heavy inference to what is “right” or “wrong” for someone to do:

        a common mischaracterization is that rent controlled units = below market rate (BMR) units. they are not equal. they are very different, were created for very different purposes, and are regulated very differently. to conflate them both legally and ethically is easy to do, but not factually accurate or helpful for pushing forward positive change.

        BMR units are explicitly allotted unit in buildings that have clear income limits to rent/buy as per SF Inclusionary Housing Ordinance

        rent controlled units are administered by the SF Rent Board and [forgive me i didn’t go too in depth in the historical policy here] was created to control rent increases across SF rental inventory in an attempt at controlling for housing inflation (to your point in this article) BUT not to address low income housing affordability. rent control has never been tied to income, but rather it was applied across SF rental units at large with exemptions for any housing built after 1979 (or illegal units).

        it is wrong (both ethically and by law) to occupy a BMR unit if you violate income levels. i’ll be at the front of the line of pitchforks if we find those people committing fraud.

        it is not wrong (ethically or by law) to occupy 1 of the 70% of rental units in SF that were built before 1979 and thus are subject to rent control because my income hit some arbitrary level (obviously i’m biased and i’d like to sleep better at night thinking this for my own soul but i do believe this in a vacuum too :).

        so let us level set that RC units are not BMR units. and yes, RC does make pretty much all RC units “below market rate” to your above comment but… that is the whole intent of rent control – to not let rents rise with the natural markets of supply/demand. by definition all RC units are “below market rate” the day after the lease is signed assuming a 0.00000001% effective inflation increase but they are very much so not regulated BMR units and have no ties to income.

        so is your argument to increase the supply of BMR units (or converting RC units to BMR) en masse? that sounds like what you’re going for but that is a thorny bush and one with tons of the same supply/demand problems plaguing the overall SF rental market.

        are you asking me if RC had a whole host of unintended consequences? yep. econ books abound on artificial price control screwing up the invisible hand of the markets. if we want to fix this for real, you’d have to repeal rent control across the board but then whoa nelly would that cause a massive and immediate one-time correction that could lead to upheaval. so do you ease into it over several years? change the 1.6-2% limits over time to match the market? you would never get any of that legislation passed because again, too many of those 70% of rental units would be harmed more than helped and people vote with their own self-interest in mind (regardless of if their income is +/- $200k). who votes – current SF residents, not the folks wanting to move to SF, or already left SF, or so on and so forth.

        rent control as a poorly thought out policy is the problem and its a tough one to walk back on, unfortunately. the same could be said for all of SF housing policy at large.

        RE: “Finally, my good buddy of 10 years is leaving to LA. He texted me, “My life cannot be controlled by a rent controlled apartment any longer.” He says he’s finally going to take some risks with his gf and relocate. Thoughts on his quote?”

        1) i love that you ended with this quote – it grounds all of this in reality for you and your friends 2) if i had a nickel for every time one of my middle to upper-middle income friends think that sentiment… i’d still not be able to afford a home in SF (and achieve my savings goals :)

        i’d be interested for your interpretation of his statement too, as we obviously have differing takes on the topic.

        my take: this is the tough reality – i assume your buddy is not unlike me in that he makes good money, yet stayed in his RC apt for all the same reasons as me (despite wanting in-unit laundry, in-building parking, quieter neighbors, a reliable water heater, etc.). one of my regular convos with both work and personal friends is… “so where are you going to live when you leave SF?” as i’ve said, i love this city and almost all of my friends are here, but it’s simply not sustainable for us, let alone people making much lower incomes, to rent/buy a space for a 4 person family and not have to overinvest in housing. could i? yes, but i would be paying a ton to housing and be tied to a 9-5 until i’m 65 (and you of all people understand why that’s not too swell!)

        so in closing… i have rent control (by 7/10 chance). it enables me to live comfortably (but not TOO comfortably) while achieving my aggressive savings goals (net worth = 50x income here i come!). i pay my share of the city’s tax base and do not feel guilty about living in the 70% of the rental market that is subject to price controls that never had any intent of being tied to income. one day i will likely leave this apt and leave SF. thus is the circle of SF life (funny, it sounds a lot more like Manhattan by the day).

        PS. i’ve always wanted to write my own personal finance blog and feel like this comment thread may have finally pushed me over the threshold to do it. hope it helps bring a different POV and balanced counterpoint to your post. and hope to hear more from you on the topic!

        1. It really is funny how tech workers are blamed for the serious rise and rental prices and home prices, yet tech workers themselves feel that they cannot buy a home or are having a hard time affording the rent. Such an irony, no?

          It’s one of the reasons why I wrote the post, “career advice for start up employees: sleep with one eye open“. So many techies at start up companies are so underpaid compared to establish firms. And then their stock options are worthless over a 5 to 10 Year period, and then the wealth gap really starts to emerge due to compounding.

          What are your thoughts about instituting a renter’s tax so that the breath of tax increases beyond just the my Nordie homeowners? This way we can all pitch in to make San Francisco great!

          Perhaps forcing people who make six figures leave rent control apartments is too draconian. A better solution was to just tax six-figure renters and rent controlled apartment more.

          Don’t you agree that the rich techies should pay higher rents though? Especially those that go about saying they make $250,000 at age 26 to the world?

          Everybody who works at Uber, Airbnb, Pinterest, Apple, Google, Facebook and all similar types of firms should probably pay higher rents thanks to Haseeb revealing that a typical 26-year-old engineer makes $250,000 at these firms. To not charge maximum rent would be economic waste.

          You should definitely start your own website. Seems like you have your head on straight, have opinions and enjoy the banter. Who knows? It might one day grow huge and allow you to leave the RC lifestyle behind!

  20. Middle Class Millionaire

    Inflation is something that we just cannot avoid. Keeping money invested is a great protection against inflation because usually most assets appreciate with inflation. This is one of the many reasons that I like real estate as an investment.

    I also hold a portion of my portfolio in physical precious metals. Gold and silver are the ultimate inflation hedge. Many big time investors and economists say that you don’t “invest” in gold or silver, but holding them is like an “insurance policy” against an economic crisis (especially during periods of high inflation).

    For example… in the 1970’s the US saw some very high inflation rates. During this same time period gold rose from $35 per ounce all the way up to $850 per ounce (1980). Silver went from under $2 per ounce all the way up to $50 per ounce!

    Also, the section about the government lying about true inflation… I couldn’t agree more. The government manipulates the way that they measure inflation in order to make it appear less than it really is. is a website that will show you how they use to measure inflation. Using these same metrics they show you what the real inflation rate is today. You may be surprised at how inaccurate today’s CPI really is.

    Part of becoming financially free is staying up to date with the financial world and always knowing what is going on with economics and monetary policy. Get educated and do your homework… it is good to always be able to stay ahead of the curve.

    1. This was a super interesting post, but this is an incredibly interesting reply. I don’t necessarily agree with the precious metals part (particularly the silver part – that was due to the attempted silver corner!) and I don’t necessarily agree that the government is “lying” about inflation but I do agree that it is important to understand how CPI is calculated and reported.

      I’d be interested to know how you store your precious metals? I’d also be interested to know whether you plan to liquidate precious metals in the event of a significant increase in prices?

    2. Ah yes! Shadowstats… a site solely dedicated to parsing out the real truth in government numbers. I totally forgot about that. Pretty impressive folks are that gung ho on the subject. I simply look at the government numbers, see how they compare to expectations, and move forward. What I experience with inflation and what I read are totally different. I hope more people are mindful of this.

  21. Hey Sam,

    Good post but I think your math is off.

    Value of house year 1 = $1,525,000
    Value of house year 20 = $2,500,000

    1525000 * (1 + x)^20 = 2500000

    Solve for x and you get 2.5% price inflation per year, not 4.85%.

    CPI is just the weighted average of inflation in all the categories versus how people spend money according to the BLS. So ~1% inflation is right according to their methodology, but the real issue is they do things like make up “imputed rents” to use for housing costs. But that’s a different post :-D

    1. Thanks for calculating the growth in value of my house. Man, that sounds pretty pathetic if 2.5% is the actual annual growth rate for 20 years to 2.5 million. Maybe I’m too conservative given Zillow has it at $2,900,000 today. But best to be conservative as 2.5% is pretty close to the long term inflation rate nationally and here in SF. Further, I bake in a realistic multi-year downturn as well. So your calculation still helps make the argument that even with only a 2.5% annual increase for 20 years, you’ll see prices go up a nice million from $1.5M – $2.5M.


      The 4.85% refers to the RENT. See the entire passage here again

      “The putative cost to rent has gone from $5,500 to $9,000 today, an 81% increase in 11 years. Meanwhile, the cost to own has fallen from $4,800 to $3,000, a 38% decline during the same period due to mortgage refinancing as interest rates declined. What a paradox!

      Despite an 81% rise in rent, why does this reader still believe there is no inflation? I refuse to believe he can’t read the chart. Therefore, the only likely reason for disbelief is due to the seemingly silent but powerful effect of compound inflation.

      To get from $5,500 to $9,000 a month in rent in 11 years only requires 4.85% compound annual growth. But you can see how just a 2-3% difference above stated CPI can lead to huge numbers over time.”

      Any tips on how I can make this more clear? Maybe put RENT in bold or repeat it? All suggestions on how to make my posts more clear to readers is helpful, as if you didn’t realize I was referring to rent, others probably have the same problem.


      1. Touche, your math is right for rent, it’s my reading comprehension that was off! Sorry about that. All I can think of that’d make it clearer is to put rent in bold like you said and make rent the only highlighted column.

        It’s interesting that the cost to rent is growing much faster than the house value. Some people seem to be expecting a housing market correction based on indicators like the crazy rent to buy ratios, but if the rent growth keeps up could things start looking more normal without housing values falling? Maybe that’s too optimistic.

        1. Great and no prob. I have Bolded the word “rent” and I’ve added the word “rent” in another place as well to make it more clear.

          Part of the disconnect between the house price and the rent price is that the rent price is real and the house price is my guesstimate. Given I am always more conservative with my valuations, maybe this situation means I am too conservative.

  22. People tend to see inflation through what they personally buy. So if you drive a lot (gas down), own the same home home for 10+ years (interest rates down), and buy a lot of electronics like TVs, you probably believe inflation has been very tame in recent years. If you have a lot of healthcare expenses, rent, and are paying for 2 kids to go through college, you probably believe inflation is through the roof!

    Good article.

    1. That’s a good point. Maybe the typical consumer is just consuming a lot of things that do nothing to add to their wealth so they don’t feel it as much.

      The thing is, homeowners only realize that there is so much information because they can’t believe how much they can raise rents and they can’t believe how much so-and-so house sold for. What we actually experience is deflation and cost give it the ability to refinance lower our mortgages. This is the great paradox that every single homeowner who has held for the past 10+ years and refinance is experiencing.

      1. Nuclear Real Estate

        Agree strongly that homeowners lose touch of what they can rent properties for. I closed on another rental last Friday. Previous owner had rented the property for $750/month. I listed for $950/month and have had a otn of interest, expect it to be rented within the week… They had owned the property for 12 years, and just never thought to question their property manager who never raised rent…

  23. Seeing those most recent numbers from the BLS has been super enlightening. Its one thing to know that the cost of higher-education has increased/inflation has skyrocketed as the machine has been revving for years now but something about visualizing it makes it that much more painful. So many high-schoolers walking in a brick wall without really knowing what they’re getting into. You inspired my next piece, thanks Sam.

  24. Today in the Wall Street Journal Review Section there is an in-depth article on the “Sinister Side of Cash”….It is one of the scariest I have ever read. I would love to hear your thoughts on the idea of doing away with cash.

    In your piece above you elucidate how demand functions as a driver for interest rates. Seems to me that this would be a significant problem with incremental limitations (aside from the ones we already have) on our freedom to use cash (anonymously). The degree of control and invasion of our privacy that we would be handing over closes the lid on the Orwellian state envisioned in 1984. Not to mention the thought that we continue to use monetary policy to shore up poor fiscal planning.

    I agree, that understanding and investing in tangible, revenue producing assets is not complicated and should be apart of most investment strategies. Life is much simpler than we make it by our indentured servitude to a typical J-O-B. Real estate and small businesses are a great way to also become involved and contribute locally.

    1. Nice tangent! I’d love to hear your opinion on the article first.

      I’m not really getting the cash and invasion of privacy angle you speak of. Would cash allow people to consume more privately?

  25. I can’t believe that person didn’t believe that inflation existed. Anyone remember $5 Subway footlongs? Businesses have to raise prices because employees demand a higher salary every year to at least keep up with inflation. Employees may not feel like they deserve a promotion but they sure as hell feel like they deserve to keep up with inflation.

    Continuous investment is the way to go for cash to appreciate in value! Otherwise inflation will suck the value right out of it slowly but surely. The all-too important spread between inflation and returns should be a closely watched number.

    1. It really is a dream for landlords when people do not believe there is any inflation. It makes raising rents much easier. I shouldn’t be talking about how there is really this much inflation as a landlord. But nobody here is my tenant so it’s best to help people see the light that shorting inflation is a losing proposition.

      1. Ha, taking into account on all aspects of your business ventures, I love it! I hope that we don’t get into a period of stagflation or deflation anytime soon. Prices falling could make the GDP fall if we can’t make it up in volume and can’t have that when I just started work last month!

        The economy being the best it’s ever been (stock market wise) is frightening me a lot. I’m going to assume that the company that I’m working for will let go of entry level employees before they let go of anyone else. It becomes all the more important to have side income opportunities to be a price dictator so that I can raise prices to keep up with inflation.

      2. Isn’t it just as easy for landlords to raise rents when people do believe in inflation? It justifies the rent increase and renters are understanding of the increased costs faced by landlords. I suppose it’s not as good because the landlord in this case loses value on the extra rental income due to the inflation.

  26. Hi Sam,

    This post is top quality, whether somebody agrees with the conclusions or not.

    I own a place in London and another in the city where we are planning to spend the next phase of our life. Emotionally I am leaning towards selling the place in London instead of keeping it and renting it out, but the main driver of that is not financial return but rather not having to spend the time to take care of whatever trouble might arise with the tenants. Free time to pursue other interests is key to the next stage of my life. As you said, it highly depends on the individual circumstances.

    I generally agree that if you are happy to dedicate time to it to continuously optimise financial return through refinancing, rent management or other means, owning a property in the right place is, from a financial standpoint, difficult to beat as an investment. The real inflation on the things that actually represent most of your monthly expenses if you are in the 30-50 age range is very meaningful and very little things can protect you against that more than a property.

    1. I wish I bought London property when I was there in 2005. What an amazing meteoric rise your city has seen.

      I’m also getting to tired of real estate and having more than four properties is just too much for me. I did seriously consider selling one of my rentals this summer but I got a tenant that was willing to pay the 5% rental increase and seem OK. We shall see how good of a tenant they really are in a couple years.

      My general recommendation for people who own property is to try to hold on for as long as possible until you just can’t take it anymore or your world is so great that the cash flow really doesn’t matter anymore.

      1. If you are tired of keeping up with real estate now, wait until your baby is born… :-)

        Having a baby/toddler/kid took away a lot of time that I used to put into investing.

          1. As a soon to be dad in the Bay Area, I’d love to read a post about how you came to that decision.

            Wife and I are struggling to figure out the best way handle child care with two full time working parents.

  27. I can understand how inflation can be confusing to many (myself included sometimes). Good idea to lay it out so all readers can keep it in mind and keep investing

  28. Sam, I believe your example is based on your San Francisco property? This is one of the three (?)) hottest real estate markets in the country? I don’t disagree with your fundamental position, but you’ve picked an extreme example to highlight a point. It’s like saying you need to own stocks: look at Tbills vs FB vs look at Tbills vs SP500. A few other city examples would make your point even stronger.

    1. Sure, no problem. Let’s exclude New York City, Los Angeles, San Francisco, Miami, Denver, Portland, Austin, Seattle, and Boston for good measure. I use SF b/c this is where I live, and this is where I have a real property with exact history to share.

      Take a look at the chart under “How Are Consumer’s So Easily Confused?”

      You will see a national median rent versus income chart where national median rent is up 64%, inflation adjusted since 1960 versus national median household income up only about 18.5%.

      Do you think I should make the chart bigger or put it in a different place in the post? Maybe at the end? Let me know how I can improve the message of this post.

      Where do you currently live? And what was your rent back in 2000 or 2005 versus now?


      1. Hi Sam and thanks for the response. I enjoyed this post and agree with your overall position and message. I was referencing your table example where you showed rent vs mortgage for your house. A national average example to compliment your SF example would be great. I think people (scratch that and replace with I) asterisk some of your posts because SF in an extreme example of real estate growth.

        I currently live in the Chicago suburbs. My house has appreciated very little in the last 4 years. Chicago proper may have done better though.


        1. Hmmm, I wonder why the Chicago suburbs is lagging. Has Chicago itself seen strong rental and property price appreciation growth since 2009? I suspect yes, especially properties along the gold coast.

          I’m not too familiar with the area. Nice city, I just can’t take the cold for 6 months a year! I’m truly much happier in shorts and t-shirt weather, which is why I’m often heading out to Hawaii or Lake Tahoe (here now whoo hoo!).

          Any desire to relocate to a different area of the country with more temperate weather and perhaps stronger economic growth? Could be a key to greater happiness and wealth!

          I wrote this post a long time ago (updated) that continues to get a lot of hate comments. Perhaps you will enjoy it! :)

          West Coast Living – Yes, It Really Is That Much Better!

          1. I’m from Chicago, and yes many parts of the city have appreciated. Rents seem pretty high as well. In the last few years, companies located in the suburbs have been moving to downtown, to take advantage of educated people who live in the city and have no interest in living in the suburbs. Who wants to maintain a 5 acre, 5000 sq ft property anyway?

            I actually think Chicago is a great city to build wealth in. You can take advantage of HCOL salaries, yet still find deals on living (i.e. I live in a $950/month 1 bed apartment).

    2. Just to give a different perspective, I own a 3/1 home in rural Central California. When I bought back in 2012 rent were about $800 a month, now I have been offered, if I ever buy another home, $1600 a month which is the average going rate now.

      Wish I had the capital to take advantage of the situation, but I am just starting on my financial journey.

        1. I bought a house 25 miles east of Sacramento in 2010 for $325K, it is now worth $500K so yes, housing prices have risen.

    3. I live in Phoenix, not a hot market at all and hit hard by the real estate bubble, and rents are up massively. Young people are really struggling to afford them on the low wages that are paid here.

        1. I must live in the twilight zone in the NYC area where my rent went up 2% on a 2 year lease (evidently there have been people renting here for 20-+ years). Not buying anything just yet as I’m enjoying investing the delta in rent vs buying and letting the market do its thing.

          1. Nice job getting a rent-controlled apartment in NYC! Lots of those there. Pre-war building?

            But just imagine if those who’ve rented for 20 years bought 20 years ago. Oh my…. what a bargain. Even the property I wanted to buy in 2001 on 21st between Madison and Park has almost tripled since.

            Shoulda, coulda, woulda. Damnit!

            1. A pre-FYI, there arent many rent controlled apartments left in Manhattan.

              My apt, not even a rent stabilized one, actually. The building has almost 100 units and some of the units in the building are still rent stabilized. It is entirely possible there are rule governing the amount they can raise the rent of the non-stabilized ones if x% of the units in any building are stabilized (those units are governed by a city board that meets yearly and decides the increase for all stabilized units…last year it was 0%)

              And, I don’t have a time machine to go back 2 years (if you do, can please borrow it? I’ll be back right after I leave). Presently I’m in a 1BR since I don’t need more. Were I buying, I would do at least a 2BR (MUCH easier to move) which, after the mortgage (assuming 20% down) + the maintenance, insurance, etc. would likely run me $800-$1000 more a month than I’m paying now (the maintenance on these building can be high…as they are mostly co-ops, taxes are included but you don’t get to see what their financials are like).

              I’m in GCC’s corner in terms of renting. Its not the right choice everywhere, but in this city, you may come out ahead of others who chose to go all in and buy. I’ll invest that difference any day of the week.

  29. Dividends Down Under

    Good points Sam. You have to keep up with inflation or else it will catch us up and take over. We’ve decided that even once we’ve fully retired, we will still continue investing, so just we’re sure our income keep increasing.


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