EP 030: REAL Interest Rates and Their REAL Impact

I almost got the deal of the century this week.

The opportunity to buy a property from a panic seller at nearly a 20% discount!!!

“Almost” being the keyword…

Let me explain.

It had been brought to my attention that someone I know was looking to offload a property quickly due to interest rate rises.

They were feeling the pinch and could only see things getting worse.

So, they wanted out before a big potential sell-off.

I was feeling a bit opportunistic and thought I would take a call with the owner.

…which was a mistake in hindsight…

When I spoke with the owner, I tried to play it cool.

But they could see just how keen I was to buy it.

That’s when they started to realise they might be missing something.

(Ahh, human psychology is interesting.)

My excitement and enthusiasm for the property was the thing that made them change their mind.

And in the end, they did not sell.

I had better work on my poker face…

Although, it was probably a good thing I missed out.

As I was trying to be opportunistic rather than sticking to my plan.

A good deal that doesn’t fit my plan is NOT a good deal.

Another way to put it:
“The shoe isn’t a bargain if it’s the wrong size!”

In this week’s episode:
○ Real interest rates
○ Private online schools

Prefer to listen or watch?

You can hear Grant and I discuss these topics in more detail on the podcast
Click here to tune in: https://linktr.ee/businessandinvestingcom

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WHAT HAPPENED

The REAL impact of Real interest rates.

First up let’s define what “REAL” interest rates are.
Then, we will walk through an example.

“Nominal” interest rates are the rates the bank gives you when you borrow money.

EG: You get a loan from the bank, charging you 5% PA (per annum).
The “Nominal Interest Rate” is 5%.

“Real” interest rates are nominal interest rates minus the inflation rate.

EG: You get a loan from the bank at 5% and the inflation rate is 3%
The “REAL interest rate” is 2%

5% – 3% = 2%

To put it simply…

REAL interest rates are a measure of the cost of debt while factoring in the inflation rate.

Why factor in inflation when borrowing money you ask?

Great question!

It’s because when you borrow money, inflation erodes the purchasing power of that money.

EG: You borrow $1,000,000 and inflation is 10%. The debt is being eroded by 10% per year.

After 1 year the $1,000,000 you borrowed only has $900,000 worth of purchasing power due to inflation.

Keep with me here – as this is where it gets interesting (and important).

Why should you care about REAL interest rates?

Right now, in many places across Australia, the inflation rate is HIGHER than the cost of debt.

Again let’s use an example to explain it.

Let’s say I buy a house for $1,000,000.
And I borrowed $1,000,000 from the bank with a 5% interest rate to make the purchase.

The interest cost on that loan is $50,000 per year.

If the inflation rate is 10%
My debt is eroding at $100,000 per year.

Which means that the REAL interest rate is -5% 

5% – 10% = -5%
(yes NEGATIVE 5%)

What does this mean?

In this example, I’m making $50,000 a year from inflation!

The debt costs $50,000 but I’m making $100,000 from inflation.

And this doesn’t factor in any rental income or property appreciation.

The key point.

“It’s possible to make incredible returns from real interest rates and the use of debt.”

This has been one of the key strategies I have used personally.

And also… how people like Robert Kyosaki invest and why you always see them advocating the use of debt.

But. I must say one thing…

Be VERY careful with the information I just shared with you.
This is where many people get wiped out also.

Even if you are making huge profits from real interest rates…

You still need to come up with the cash to support the loan on the property.

If you are going to use leveraged strategies please get advice from professionals.

(which is not me)

Please note this concept doesn’t just apply to property.
It can be used in other asset classes and your business.

I do find it interesting we don’t see many people talking about the positives of inflation and how it can be used to our advantage.

Anyhow, on the podcast, this week Grant and I unpack some examples of this in use.

Well worth checking out if you want to learn more about “REAL” interest rate.

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WHAT HAPPENED

Private online schools.

Last week I noticed a Facebook ad in my newsfeed.

Victorias 1st Private Online School

Taking expressions of interest for 2023 enrollment:
○ Haileybury School

I almost couldn’t believe it.

Haileybury is a very prestigious school.
Not one I would think of as a disrupter.

What makes this really interesting…

In 2021 when Haileybury offered online learning due to lockdowns they produced one of the best sets of VCE results in its history!

Eight students achieved the highest possible ATAR of 99.95.
And, 51% of students finished in the top 10 of Australia.

It appears that Haileybury has cracked the code with online learning.
They were forced to build it in lockdown and now see the potential.

Talk about innovation!

High school is about to be disrupted in a big way.
This is Netflix coming for Blockbuster all over again.

Think about it.

This now means they can enrol students from all over Australia.
(Significantly increasing their potential market size.)

And.. they don’t need to build more buildings or make more room on school grounds.

I can only imagine what this does for their profit margins.

These are the types of post-pandemic moves I like to see.

Moving forward and innovating.
Not trying to go back to the old ways.

In my opinion, this is the start of a big trend and more schools will follow.

I’m also hopeful this will help more kids access high-quality education rather than what is only available to them locally.

Higher skilled Australians are a net benefit to everyone!

I go into more impacts of online schools on the podcast you check that out below.

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UPCOMING

Be on the lookout…

Grant makes a tidy profit selling a business!

Later this week I will be unpacking one of Grant’s recent investments.
After 5 years of building a company, he has sold it off.

But, it’s the details of the deal that make it particularly interesting!

DISCLAIMER:
All information we share is NOT financial or investment advice and is purely intended for entertainment and educational purposes only. Always seek professional advice before acting on any financial decision.