Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Quietly Eating Your Rental Property Cash Flow
Transcript
- Lucas: So you've heard the advice a hundred times — if you want to beat inflation, buy rental real estate. Landlords can raise rents every year, right? Problem is, the costs have been rising faster than a lot of landlords can keep up with. Luna: Are we talking about the mortgage or something else? Lucas: Actually it's everything else — property insurance, maintenance, property taxes. I was looking at a recent analysis from the National Association of Realtors, for a typical single-family rental in the Midwest, operating expenses grew by about 8 percent last year while rent growth was closer to 4 percent. That's a shrinking net operating income. Luna: So the cash flow gets squeezed even in a supposedly inflation-proof asset. Lucas: Exactly. And here's the thing — with the ten-year breakeven inflation rate now at 2.26 percent, up from 2.20 last week, the market is pricing in higher inflation ahead. But if your property expenses are growing at twice that rate, your purchasing power is getting eaten just as fast as if you held cash. Luna: What about the idea that real estate appreciates? Doesn't that offset? Lucas: It can, but appreciation is not realized until you sell. In the meantime, you need cash flow to cover expenses. And if net operating income shrinks, your property's valuation actually drops because investors capitalize that lower income. Luna: Let's break down where those costs are coming from. Which one is the biggest culprit? Lucas: Property insurance has been the shocker. I've seen quotes jump 15 to 25 percent year-over-year in states prone to weather events — Florida, California, even parts of the Midwest. And that's not a base effect; it's a structural repricing of risk. Luna: And property taxes? Those aren't exactly flat either. Lucas: No, they're not. In many municipalities, assessed values have shot up during the pandemic and post-pandemic boom, and even though home price growth has cooled, the tax bills are still catching up. A lot of landlords I've talked to saw their tax bill rise 10 percent or more last year alone. Luna: And maintenance — that's one that can vary wildly. But with inflation still running hot on labor and materials, even routine repairs cost more. Lucas: Right. The Bureau of Labor Statistics data shows the cost of home maintenance and repair services has risen about 7 percent annually over the last two years. So if you're budgeting $5,000 a year for a single-family rental, that's now $5,350. It adds up. Luna: So what does this mean for someone who's thinking about buying a rental property right now? Lucas: Two things. First, don't assume you can just raise rents by the CPI rate. In practice, rent growth is constrained by local wages and supply — if you raise it too much, tenants move out and you have vacancy costs. Second, model your expenses with a buffer. I'd suggest budgeting at least 10 percent annual growth in operating costs for the next few years. Luna: That sounds conservative — but maybe realistic given the trend. Lucas: I'd rather be pleasantly surprised than undercapitalized. And look, I'm not saying rental real estate is a bad investment. Long-term appreciation and leverage are powerful. But the cash flow story is trickier than it was a few years ago. Luna: And if you're a renter, you're feeling the pinch too — because those higher costs get passed through somehow. Lucas: Yeah, that's the other side. If you're renting, inflation isn't just about grocery prices. Your landlord's rising insurance and tax bills mean next year's lease renewal could come with a bigger hike than expected. Luna: Seems like nobody escapes this quietly. Lucas: That's the name of the show. Quick honest thing — a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these episodes possible. No ads, no sponsors, just the community. Luna: Yeah, and we really appreciate everyone who does. It keeps us independent and lets us dive into these detail-heavy topics without worrying about selling something. Lucas: So back to those property taxes — they've been climbing especially fast in states like Texas and Florida, where there's no state income tax but property taxes carry the load. Some landlords there are seeing effective tax rates over 2.5 percent of market value. Luna: That's a huge drag on cash flow. How does that compare to, say, the Midwest? Lucas: Midwest is typically lower, around 1 to 1.5 percent, but those states have seen faster assessment growth because home values rose more sharply during the pandemic. So even the percentage stay low, the dollar amount jumps. Luna: So overall, if you're a landlord, the key takeaway is to track your expense growth rate and compare it to rent growth. If they're diverging, you need to adjust your strategy. Lucas: Right. And for investors looking at rental properties as an inflation hedge, I'd say: it still works, but the hedge isn't automatic. You have to actively manage that margin between income and costs. Otherwise, inflation is quietly eating your cash flow just like it eats cash under the mattress. Luna: And if you're a renter, maybe ask about how much your landlord has raised rent in the past year, and what's driving it. Lucas: Good point. Transparency helps. Alright, that's it for today. Next episode, we'll look at another hidden inflation trap — and it's one you might walk right past every day. Luna: Sounds intriguing. Talk to you then.