Nothing.
Absolutely nothing.
Nothing happens when Elon Musk tweets a broken heart emoji.
Or a diamond hands emoji.
Or any other emoji.
If you’re a commercial real estate investor that is.
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Remember those charts they showed you? How your $200k mortgage would cost you $555,555.55 to pay off over 30 years. Proving you should pay off your mortgage as soon as possible to beat the bank.
I’m here to tell you they are absolutely right.
If there’s no inflation.
There’s a different calculator to use in the case of inflation. And its effect is magnified in the case of high inflation.
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Let’s face it, friends and readers. Inflation isn’t coming.
Inflation is already here.
The evidence is all around us. Last week’s Consumer Price Index report, well known for understating true inflation, reported a massive jump.
Those of us who’ve recently tried to buy a car, build a deck, purchase a home, or even a puppy are all too familiar with what’s going on.
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People fly across borders to stare at them. Tourists pay big money to fly over them in helicopters. And a few daring souls have even built tightropes to walk across them.
Waterfalls.
Honestly, I was a bit perplexed the first time I read about one in an investment context. Then I realized almost every commercial real estate and private equity deal out there has what's known as a waterfall structure.
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One of my new investors, Bill, left me a voicemail yesterday.
“Hey, uhh, Paul, I’ve got a question on my distribution. Can you call me?”
I knew what exactly what Bill wanted to discuss. If I didn’t care about Bill personally, I could have copied and pasted another email to reply to him before he asked his question. Of course, I didn’t do that. I called Bill back after lunch, and it was precisely as I had predicted.
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Do you enjoy major league baseball? Have you thought about the great lengths someone else must go to...in order to allow you to enjoy this sport from the comfort of your recliner?
MLB recruiters work hard so we can watch from our couch or box seats, and the team owners can enjoy a nice profit.
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Do you remember where you were when the space shuttle shattered and plummeted to earth?
I do. I was on the way to lunch at the college cafeteria. I’ll never forget the horrifying images as the shuttle exploded a minute after takeoff, sending a shower of smoke, steel and bodies in a hundred directions.
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The tide has gone out. Have you noticed? Did you hear about what’s going on? So apparently someone in Wuhan, China ate a bat or something...
OK enough joking around. Seriously, commercial real estate is facing a day of reckoning. A day we knew was coming. We have been warning everyone who would listen on BiggerPockets and on podcasts, etc., since 2017.
An experienced residential real estate investor called me the other day. He was a bit new to commercial real estate and he had a question:
“I thought I heard you say that a lower cap rate means a higher price. Did I hear you right? What do you mean?”
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Depreciation Schedules. IRS codes. Accounting. Paperwork. The very thought of these concepts is enough to put me to sleep at my desk. Well, they used to be.
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I have to admit… this is not an easy article to write. (After all, I wrote a book called The Perfect Investment, where I extolled the virtues of investing in multifamily real estate.) This isn’t easy. But it’s necessary.
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