For those of you who follows financial or political news, you may have seen a lot of recent chatter about inflation. Most people view high inflation as a bad thing. Just look how the cost of a cup of coffee has increased over the years. It causes the cost of goods to go up making everyday life more expensive. But how does it affect investments in apartment complexes?
I personally see inflation as a good thing in our investment space. The reason for this is the time value of money. As you may know, money today is worth more than money tomorrow. This is primarily because of inflation. If we have 5% inflation in the cost of goods a year from now, you would require $1.05 a year from now to be equal to $1 today. In addition, because we generally go with a fixed interest rate, rising inflation only serves to benefit us. Imagine a scenario where we are paying interest only on a loan of 3% and there is a 5% year-over-year inflation rate. We essentially just profited on our loan because we came out ahead on loan rate vs interest rate. This works because if I borrow a $1 from you today and owe you $1.03 a year from now, however due to inflation that money is worth $1.05 now, we just made $0.02.
Now, realistically that won’t happen because the Fed has indicated if inflation were to begin to take off, they would work hard to reel it back in, but, the higher inflation goes the narrower the gap becomes it and our interest rates which benefits us and our leveraged capital
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