Inflation is a thief, a silent tax that erodes the value of our currency.

It has subtly changed the rules of money and plundered wealth from many who uphold conventional beliefs such as saving money and being “debt-free”.

That being said, how do wealthy people see inflation, adapt to the new rules of money and emerge victorious through savvy investing? Here are some of the mindsets or rules that they follow:

Savers are losers

This quote came from Robert Kiyosaki, a master in the topic of personal finance.

His intention is to not discredit anyone who has a habit of saving money. Rather, he is against people who believe that they can literally save their way towards financial heaven.

In Malaysia, our inflation rate is, on average, 1.86% a year for the past 10 years, which is close to 2% per annum.

So, here’s what that means for us. Let’s say, we have RM50,000 and we park them all in a fixed deposit (FD) that yields 2% per year.

A year later, the RM50,000 in FD will grow to an amount of RM51,000. However, the rate of inflation in our nation is also 2% per year, so essentially, your RM 51,000 would have the same purchasing power as the RM50,000 a year ago.

The winner will be real estate investors

The winner will be a person who has the ability to build wealth using debt.

This includes savvy real estate investors. For instance, let’s say we start with the same RM50,000 in capital. Instead of FD, we use it to buy an apartment for RM300,000 in the subsale market.

Let’s assume that we take a mortgage that amounts to RM270,000, where its interest rate is 3% a year and its loan tenure is 35 years. Thus, its monthly instalment is RM1,039 a month.

The RM50,000 in capital is used to pay for the 10% downpayment (RM30,000) and other related expenses (transaction costs and minor refurbishments).

What it means is that we can borrow RM270,000 (current value) for the purchase of our apartment today and then, repay the debt with currencies that are worth less in future years.

Hence, if the mortgage rate is 3% a year, and if the inflation rate is still 2% a year later, the real cost of your mortgage is 1% a year (3% – 2%). It is almost like owning an apartment for free.

Let tenants pay off mortgage

Let’s move back to the RM300,000 apartment as an example.

The mortgage instalment is RM1,039 a month. In the first 10 years of servicing the mortgage, RM 615 (59%) of it shall be interest costs to the bank while RM424 (41%) of it shall be used to repay the loan’s principal.

We rent the apartment unit out for RM1,000 a month, and incur a monthly expense of RM200 for both service fee and sinking fund.

This means our beloved tenant will bear our interest cost of RM615, pay for the monthly expenses of RM200, and finally, chip in RM185 per month to help us settle our loan’s principal (known as amortisation).

In this case, we just need to fork out RM239 a month to repay the loan’s principal which is basically a type of “forced savings” as it is still our property equity.

As the tenant pays for the full interest cost of our mortgage, we’ll basically own the apartment “interest-free”.

Real wealth is in real estate

Let’s say we manage to keep our apartment tenanted for 10 years.

Our tenants have been paying our interest costs for 10 years. Meanwhile, the outstanding principal of our mortgage will fall gradually over time and after the tenth year, the amount of mortgage outstanding will reach RM219,121.

Let’s assume that the value of our apartment has increased by 2% per annum, which is the average inflation rate in Malaysia over the last 10 years. Hence, the market value of our apartment shall increase to RM365,698.

Our property equity at Year 10 is RM146,577 (RM365,698 – RM219,121). This works out to a compound annual growth rate (CAGR) of 11.35% from RM50,000 in initial capital in 10 years.

A CAGR of 11.35% on your capital sure beats the inflation rate of 2% a year and this is a method of how the rich gain their wealth in an inflationary economy.

There are extra perks for real estate investors

Remember the RM1,000 a month in rental income from our apartment? Do you know that it is possible for this income to be tax-free?

If you deduct the RM1,000 a month in rental income from deductible expenses such as mortgage interest costs, quit rent, assessment, service fee, and sinking fund, you could be in a rental loss position.

If that is us, then, we don’t need to declare any income from our apartment as we will put in RM0 in our income tax file and thus, pay zero taxes on the rental income received.

But, our banker, the one who lends us money to invest in our apartment, would love to extend us more “almost-free money” to buy more investment properties as we make RM1,000 a month.

Do not underestimate the power of RM1,000 a month in rental income.

To them, based on a maximum debt-service ratio (DSR) of 60%, they can extend their mortgage lending to you by approximately RM120,000 for each RM1,000 a month in rental income. This lending is crucial for you to continue to build up your property portfolio over time.

So, will you emerge as a winner during an inflationary economy?

This article first appeared in kclau.com.

Ian Tai is a financial content machine, dividend investor and author of over 450 articles on finance featured in KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’, and ‘Small Cap Asia’ in Singapore. He is a regular host and presenter of a weekly financial webinar with KCLau.com.