Inflation is a dirty word to many people, and the mere mention of it can send someone into a tailspin. That’s because there’s rarely any meaningful way to combat it other than to increase the amount of income we earn. Most people overlook the one resource that can increase in value with inflation: real estate. In fact, there are several ways that inflation can work in your favor as a property owner.
As inflation raises the cost of living, the prices on everything, including real estate, rises. On average, this means you can expect your home’s value to raise by 3% to 5% on an annual basis. In larger cities, where real estate is at a premium, inflation can raise the market value of your home by up to 10%. Taking an annual appreciation of 6% on a $100,000 home, that value of that property would be as high as $179,000 within a decade. At a minimum 4% rate of inflation, that same home would be worth $148,000 within those same 10 years.
In terms of buying real estate as an investment, renting out your property can help you generate more income as the cost of living rises. You might start out asking $1,000 per month, but inflation would compel you to raise the rent you ask for each unit. By increasing the rent in $20 increments each year, you could be earning over $200 more for that same rental space after just one decade.
Depreciation of Your Debt
As you pay your mortgage on the property, you’ll also be building equity that can be leveraged against what you owe. This means the same payment will be worth more when weighed against the shrinking debt. As inflation raises the prices, you’ll actually be paying less while making a bigger impact on your debt. In this way, inflation is actually working in your favor.
There’s no stopping inflation and you can expect a minimum of a 2% increase in the cost of living with every burst of inflation we experience. While the increase of prices on virtually everything can create a hardship, you can actually use those economic changes to your advantage by investing in real estate. Over time, rising real estate costs will help your property appreciate, which means you’ll have that much more equity to your name.