Impact of Inflation on Basic Real Estate Investing Modeling

[James Orr]

I'm starting to model some much more sophisticated scenarios of buying investment properties, but before I even got too far into it, I began modeling the impact of inflation on your paycheck and personal expenses.

For example, I ran four different scenarios.

1. No inflation on your paycheck and personal expenses: the $5,000 per month you earn is still $5,000 per month 40 years into the future. Your expenses after taxes remain the same as well so you can save $160 per month (until your real estate property taxes and insurance increase). Unrealistic, but super conservative as well.
2. 1% inflation on your paycheck and personal expenses from inflation. The amount you earn increases, but so do your expenses including property taxes and insurance. Your mortgage payment does get locked in.
3. 2% inflation... you get the idea.
4. And, finally 3% inflation.

This small change alone, has a pretty significant impact on your net worth if you assume that you put your savings into the stock market and could magically earn 8% per year from that (which I feel is optimistic).

Here's a chart showing the difference in net worth between the 4 scenarios.

And here's a zoom in showing just month 480 at the very end.

Much of the difference in the networth is from being able to save more money and invest it in the stock market (since the one property you own is the same for all 4 scenarios). But, it does show that the assumptions you make when doing your modeling about inflation's impact on your income and expenses can be far reaching over a 40 year analysis.

If it matters, this was based on a property in Severance, Colorado (near Fort Collins, Windsor, Greeley areas) but I don't think the property in this example has a huge impact on the difference between the scenarios.