Real estate investors look quite relaxed at the increase in inflation. In fact, they even benefit from it. Twofold! Firstly, the value of property raises with inflation. Secondly, and even more important, the mortgage they have taken on becomes smaller and easier to pay back. In the US, the estimated annual inflation rate in February 2022 is at 7.9%. That is substantially higher than the target inflation rate of 2% and the nightmare of every cash and fixed-interest bond holder.
1. Real Estate Prices and Rent Increase
Property values and rent highly correlate with inflation. Historically, property values have always increased more than the annual inflation rate. This is because, if maintained properly, real estate provides the same value to tenens for decades. Therefore, rent can be also increased according to the inflation. The salary of prospective renters goes up during inflation. Thus, the landlords can increase the rent such that the same proportion of the tenant’s paycheck ends up in the landlord’s pocket.
2. The Mortgage Payment Becomes Less
Just to be clear: The total amount of the mortgage stays the same. Still, the morgage gets less effectively because money becomes worth less. This is true for mortgages with fixed interest rates. E.g., assume the landlord pays a monthly mortgage payment of $1,000 to the bank while earning $5,000. Now, assuming 10% inflation, the landlord’s income will increase to $5,500 a year. Yet, the mortgage payment will remain at $1,000. Hence, it becomes easier over time to pay the mortgage back. Outstanding credit becomes much less over time under high inflation.
Conclusion
Real estate investors are not afraid of high inflation. In fact, they even pray for it to come because they profit twofold. Property prices and rent do not only increase with inflation, most importantly, debt becomes smaller at the same time.