Finance Tip Friday #58: How Inflation May Have Actually Added to Your Net Worth

For the majority of 2022, the economy has been savagely beaten down by inflation. The 12-month increase in CPI was over 8 percent – a rate we haven’t seen this high in 40 years. Everyone has felt the brunt of these cost-of-living increases, especially those of us with our own nurse practitioner businesses who suddenly have to pay more for everything from rent to employee retention.

However, could there be some silver lining to this entire situation with inflation? According to real estate guru Jason Hartman, he believes the answer is “yes”. And it’s through real estate using a phenomenon he describes as inflation-induced debt destruction.

What is that? Inflation-induced debt destruction is when the value of the money you owe becomes eroded by inflation. Consider this:

  • When you’re locked into a loan arrangement such as a mortgage where the balance and interest rate are predetermined, it makes sense that the time value of what you owe will be worth much less than it is today. 
  • However, during periods of high inflation, especially those where the rate of inflation is more significant than your loan APR, this process can become even more greatly accelerated.

Think about your mortgage for a minute. For every $1,000 you pay now, that same thousand dollars won’t be able to buy as many goods and services in the future. In roughly 20 years, that same $1,000 will only be able to buy you about $500 worth of goods. That means your fixed-rate mortgage will seem much smaller than all your other expenses if you’re still making mortgage payments.

But it gets better. Inflation-induced debt destruction can also help you become a better investor by adding to your rental property portfolio. Let’s look at how:

  • You’ll borrow money from the bank to finance the purchase of the real estate. Just like your mortgage, this balance will seemingly become smaller over time.
  • The rental payments you’ll receive from your tenants will be used to pay back this mortgage. However, these rental payments will naturally increase in value over time, thanks to inflation. Meanwhile, your mortgage payments will remain static, so you’ll have a higher monthly profit margin.
  • As the property’s market value also increases with inflation, you’ll automatically have more equity that can be recaptured when you finally decide to sell it someday in the future.

This is not only another example of why diversifying your assets is important but also a lesson in how the way we perceive money can be leveraged to our advantage. Though high inflation is obviously bad in many ways, you have to be able to disarm the situation and turn it to your advantage. As an entrepreneur and investor, that’s what you do – take a problem and turn it into an opportunity!

2 Responses

  1. Do you have any suggestions for learning more about buying rental property and being a landlord for us greenhorns?

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