Inflation and Appreciation Variable for Long Term Projections

6 Replies

What variables would you use for the long-term projections of your portfolio? I am trying to create a conservative, middle of the road and aggressive calculation of my net worth and net profit.

This article says inflation averages 3% a year long-term and real estate 3.1%.  This website says inflation averages 3.22%. There is a lot of data out there.

What numbers would you use for the projections below? And what data would you use to get those numbers?

Property Value Increase: Conservative -      Middle of the Road -      Aggressive -

Rent Increase: Conservative -        Middle of the Road -         Aggressive -

Tax Increase: Conservative -       Middle of the Road -       Aggressive -

Insurance Increase: Conservative -       Middle of the Road -       Aggressive -

Association Fee Increase: Conservative -       Middle of the Road -       Aggressive -

Maintenance Cost Increase: Conservative -         Middle of the Road -        Aggressive -

We use 3% across the board for all projections (rent increases, property value increases, and expense increases). 

Curious, why do you need all three (conservative, middle, aggressive)?

That sounds like a nice middle of the road strategy @Sam Grooms . The reason for wanting all three is because I am evaluating if I want to buy any more real estate and I would like to have some kind of confidence interval of my likely outcomes so I can make that definitive decision. With small percentage changes making such a large impact over time, it feels like just having 3% across the board leaves a lot of information out when dealing with a portfolio of over $1 million and a time horizon of 30 years+.

If you're working with a time horizon of 30+ years, that's even more of a reason to use 3%. Stay with historical trends. 

No one can predict the exact rate of inflation/appreciation, so I wouldn't make such impacting decisions based on what I know is going to be a faulty estimate. 

Even in 2014, people were underwriting using 3% for rent expenses. Now, we know rent increased a lot more than 3% in the last 4 years. But guess what? Those same people are still using 3% when underwriting, knowing that in the long term, it'll likely have a way of correcting itself back to 3%. 

Now, I will say this. If you're buying property in a certain area, obviously don't use nationwide appreciation rates. If I'm buying an apartment complex in Michigan that I plan to hold for 10+ years, I'm probably using less than 3%, with the decline in population and job growth. 

That makes sense @Sam Grooms Thanks. My properties are within 50 miles of NYC near the shore and in Colorado within 1 hour of Boulder and Fort Collins, so I think 3% would be a safe estimate for appreciation.

@Brian M. I would echo what @Sam Grooms shared about using 3% for a 30 year time horizon. The way I see it, a more "aggressive" approach would be to zoom in on those particular markets you mentioned to analyze shorter-term market conditions where >3% appreciation is absolutely a probability. The data I found most helpful for this comes from the Federal Housing Finance Agency, which sorts its data out by MSA (Metro Statistical Area), i.e. much more granular. Here you can look at each MSA by quarter, 1-year, 5-year, and since-1991 appreciation. 

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