Impact of Inflation on Debt

[Martin Zawarski]

I am listening to podcast 13 with Leon Yang and he made a comment that I would like expanded on. It is something I never gave much thought to but it does need thought. Over the last five years ago our government has been pumping in billions of dollars into the economy. Inflation has been held in check here although the value of our dollar has decreased in the world markets. But we had QE1, QE2, 3,4,5,and maybe even 6.

The question is what is the effect of inflation on debt that you own on your properties? They never spandex on that in the podcast after the statement was made. I need further enlightenment.

[Asher Anthes]

The way I think about it, because we know inflation is inevitable in the future, you should try to get as many fixed mortgages as you can now.

If you have you properties leveraged at 80 and 90% LTV and your rates are locked in at 3-5%, when inflation does come your returns go up.

Your debt service costs will stay the same, while your rents should increase proportional to inflation.

Also, if you have a mortgage at 4% and inflation is 3%, your effective interest rate is 1%. Say inflation goes to 5%, no all of a sudden, that 4% debt is MAKING you money.

So, I'm getting leveraged up!