The #1 Investment of 2019

What's up you guys? It's Graham here. So, we're gonna be going on a bit of a journey with this video, and going down the rabbit hole of investment theory. Because all of this was sparked by an article from CNBC discussing where these super-rich are investing their money. What they found was not only very insightful, but for them, it also makes a lot of sense considering the current state of our economy and which investments are most likely to become wildly profitable over the next 10 years.

For the reasons I'm about to mention now, I think we should probably dim the lights a little bit here. Because all of this starts with the very exclusive investment club called Tiger 21. It's more exclusive than Club 33 at Disneyland, and it's also more elusive and mysterious than the Skull and Bones Society of Yale.

See, the thing is, to become a Tiger 21 member, you need to have more than ten million dollars worth of investable assets. You need to pass their background and screening checks, and you also need to pay thirty thousand dollars per year of an annual membership. But assuming they let you into their cool kids' club, you'll be able to network and plot a world takeover with the world's best CEOs, investors, and entrepreneurs with a combined sixty billion dollars worth of assets.

So, given the context, I think it's very safe to assume that Tiger 21 isn't just a bunch of internet hooligans from Reddit's Wall Street bets, but instead a very carefully hand-selected intelligent group of investors who pull their expertise together to try to find the most profitable investments. From that, they've decided to shift their focus towards one investment in particular, and that would be real estate.

That's right, my favorite subject in the world, besides my own 20 cent iced coffee—real estate—which now accounts for 28% of its portfolio allocation. And Tiger 21 isn't the only investment group that agrees with this, because we're starting to see a very strong surge of real estate ETFs and real estate investment trusts, which have recently led the market in terms of all asset classes. Plus, real estate investment trusts going up in price isn't the only sign that people are starting to pay more attention towards real estate.

Because I found a recent survey from Bank Rate that shows that one in three Americans now believe that real estate is the best place to put your money over the next ten years. Real estate won by a significant margin over stocks, cash, bonds, and gold.

So that then lends us to the question: what did the super-wealthy know about real estate that most people don't know? And also, why is real estate suddenly the crowd favorite again? Well, I believe a lot of this really comes down to three simple words, and that would be low interest rates.

Low interest rates are usually like a fertilizer for real estate prices, and they're also like catnip for real estate investors. Because they know that low interest rates usually translate into lots of profit. Here's how that works: to start, real estate is mostly bought on what's called borrowed money, because very few people have five hundred thousand dollars in cash to go and buy a home.

So instead, they go to a bank and they take out a loan to buy that home. Banks love loaning money on real estate because it's considered a fairly safe investment. It has a lot of utility use in the sense that you can go and rent out the house to produce an income. You own the land, and if the buyer doesn't repay their loan, the bank can go in and just take back the property to recoup their investment.

But the bank, in return for loaning that money, charges interest to the buyer, which means the higher the interest rate is, the more the buyer has to pay. Generally speaking, the more the buyer has to pay in interest, the less home that buyer can afford. But when interest rates go down—and they're pretty low—buyers could afford to borrow more money because that money costs them less to borrow, which means that they could buy more property.

And that is where the real estate investment begins. Since the Federal Reserve lowered interest rates, it just made buying property a lot more affordable to buyers, which means the buyers could afford to pay a little bit more for a property, which further increases demand for those properties and may potentially increase the value.

But that's not the only reason why the super-rich are bullish on real estate right now. There’s another, more subtle reason that not many people are discussing, and that would be inflation. Now, when most people think of inflation, they just imagine the cost of groceries going up in price, or maybe their money is worth a little bit less this year than it was the year prior, or maybe their investments just net a slightly lower return over time.

But for real estate investors, on the other hand, inflation is like the cherry on top of a real estate ice-cream sundae. Because remember what I just said? That real estate is bought mostly with borrowed money.

Well, guess what happens to all of that borrowed money when we see inflation? It means it's worth less over time. Because inflation slowly just eats away the debt, making it easier to pay off over time. For example, if you have a $100,000 loan and we see 3 percent inflation next year, then now that loan is effectively only worth 97 thousand dollars. Because as inflation goes up, the net value of that debt that you have starts going down.

So in this sense, inflation is a wonderful thing from a real estate investor's standpoint, because now their debt is worth a little bit less than it was the year before. Now, in addition to that, real estate prices generally benefit from inflation because, as you could see on this chart throughout our history, real estate prices have increased in value in conjunction with inflation.

So, for example, if we see 2 percent inflation next year, one might reasonably expect that real estate would rise in conjunction at a similar rate. That almost serves like a half Mayweather in terms of investment.

Because not only do low interest rates drive demand and increase real estate values, but also, it lends itself to potentially higher inflation, which makes the mortgage easier to pay off while also, at the same time, raising the property value. So that, to me, is a big win-win for real estate prices—like the one to Mayweather—like the one to win-win.

I'll stop. I also found it very interesting to note that even recessions don't always impact real estate values. Now, of course, with the exception of 2008, which largely centered around the subprime loan crisis, US recessions barely had an impact on real estate values. In fact, real estate prices even continued to go up while everything else was going down.

So, given this information, given the record low interest rates, and given all the external pressure to keep interest rates low, one can start to see how real estate is slowly becoming the safe haven investment for so many people, including myself.

For example, I recently refinanced two of my mortgages over the last few months to substantially lower the interest rate, which means that I now save an extra few hundred dollars per month per property. Which also means they now cash flow an extra few hundred dollars per month per property. That also means I could get a fixed-rate three-and-a-half percent mortgage over the next 30 years.

Which, for me, means that if interest rates go up in the future, it makes no difference to me because I locked in my interest rate for the entirety of the loan. And that also means that if interest rates go down in the future, that's great because I can just refinance again and lower my interest rate again.

But if interest rates do continue on their downward trend, we might expect to see more inflation. Because there's more money flowing into the economy, which means that effectively my interest rate that I pay on a mortgage could effectively be zero.

And here's how that works: if I'm paying three-and-a-half percent in interest on a 30-year fixed-rate mortgage, I can write that interest off of my rental income that I receive on the property. That means that in my tax bracket, a three-and-a-half percent interest rate really becomes more like two point four five percent after paying taxes.

But then, we also have the topic of the video of inflation. And if we look at the recent core inflation of 2.2 percent, that brings down my effective net interest that I am paying on this loan to zero point two five percent. At that rate, after write-offs adjusted for inflation, it’s pretty much like the bank is just giving me free money to invest in real estate long term.

Then, after 30 years, the property is going to be completely paid off from all of the rental income, and I can go and just relax in Hawaii and drink 20 cent iced coffee all day long.

So, given all of this, again, I could see why people are loading up on real estate, on low interest fixed-rate mortgages, on cash flowing rental properties that they believe will rise in value with inflation, as the debt becomes easier to pay off over time.

And when it comes to me, I'm in the exact same boat as this. I want to invest as much as I can into cash flowing real estate in really good locations, on a low interest long-term fixed-rate mortgage, and then just sit back, relax, and let the rental income pay for the mortgage over the next 30 years until it's entirely paid off.

And it seems like a lot of very wealthy people are thinking the exact same way, either through investing in REITs or going and buying cash flowing rental properties.

Now, of course, to play devil's advocate here, because it's not always gonna be all sunshine and rainbows and unicorns, if interest rates do go up—and at some point they will go up—I have a feeling that will suppress demand for real estate, and you may start to see some declining prices.

However, the thing is, as sales prices go down from rising interest rates, the amount you pay on that loan will go up, which could just cancel out that price decrease altogether. For example, going and getting a three hundred and fifty thousand dollar mortgage at a 5% interest rate is going to cost you $1,879 a month.

That, however, is almost the exact same price you would pay with a four hundred and fifty thousand dollar mortgage at a three percent interest rate like you would get today. So that means even if prices go down from four hundred and fifty thousand dollars all the way to three hundred and fifty thousand dollars and interest rates went up from 3% to 5%, your monthly payment would be the exact same.

So as long as you lock in a low interest rate for the lifetime of the loan, your payment is not going to change. And as long as you make sure that property actually cash flows and you plan to hold it long term, you will limit your risk substantially.

And that is the reason why so many people are pouring money into leveraged real estate right now. And that's why I'm such a big fan of going out and finding an undervalued property that you could profit from, locking in a long-term low interest rate loan, then letting that property just pay itself off while you're still making a profit each and every month.

But of course, as always, this video is purely meant to be for entertainment purposes only. None of this is investment advice, and none of this is advocating you to speculate in real estate values. All of this is really just to get your mind thinking so you can go and do some more research and determine on your own which would be the best investment for you to make.

AKA legal warning: not investment advice whatsoever. Entertainment. So, with that said, you guys, thank you so much for watching. I really appreciate it. If you guys have not already, destroy the like button, please do that for the YouTube algorithm. It has been helping lately. It does get my videos pushed to a larger audience. So if you want to help up the channel, that's the perfect way to do it.

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