| Consumer Price Index (CPI): It is the measure of | | | | increase an employee's salary when they relocate the |
| inflation as experienced by urban consumers. CPI is | | | | employee to a city with higher COLI. The COLI is |
| more well-known among senior citizens as their Social | | | | weighted according to percent of income spent on |
| Security benefit checks are adjusted to the CPI on | | | | groceries (12.49%), housing (29.84%), utilities (9.94%), |
| January to keep pace with inflation. While most | | | | transportation (10.73%), healthcare (4.07%) and others |
| commercial real estate leases have fixed annual rent | | | | (32.93%). You could obtain the indexes for various |
| increases, e.g. 2%, some have annual rent increases | | | | cities from |
| based on the CPI. Therefore, knowing what CPI is and | | | | The website has a COLI comparison calculator for |
| how to calculate it is an important factor in making a | | | | over 300 US cities which provides the costs of 60 |
| sound investment decision. | | | | various items in each city. In 2007, the COLI for San |
| The US Department of Labor, Bureau of Labor | | | | Francisco was 169.5 while Dallas was only 91.5. This |
| Statistics collects data about costs of various things | | | | means you would have had to earn 85% (169.5 minus |
| from 87 urban areas in the US. The data is published | | | | 91.5 then divide by 91.5) more in San Francisco to |
| each month and available from the website | | | | maintain the same lifestyle in Dallas. Most of the costs |
| stats.bls.gov. The CPI varies for different regions: | | | | will be higher in San Francisco, e.g. housing is 285% |
| Northeast urban, Midwest urban, South urban, West | | | | higher (housing index is 278.3 in San Francisco and |
| urban, US city average, as well as 14 major metro | | | | 72.3 in Dallas), some expenses may be lower, e.g. |
| areas. | | | | utilities are 11% cheaper in San Francisco compared to |
| So, knowing which CPI stated in the lease will enable | | | | Dallas (utilities index is 88.1 in San Francisco and 98.9 in |
| an investor to correctly calculate the rent increase. For | | | | Dallas). |
| example, the CPI for US city average was 190.9 in Oct | | | | An investor often reviews demographic data of a city |
| 2004 and 199.2 in October 2005. This reflects a 4.3% | | | | where the property is located and generally prefers to |
| increase for the above period or in another words, the | | | | invest in areas that are more affluent. However, |
| inflation was 4.3% during that period. So if the rent | | | | looking at data of the Average Household Income |
| from October 2004 to September 2005 was $1000 | | | | (AHI) alone does not give you the whole picture. Let's |
| month and the lease has CPI-based rent increase, then | | | | assume you are an investor in the San Francisco Bay |
| the new rent from October 2005 to September 2006 | | | | Area and you want to see how the AHI in Plano |
| would be $1043 a month or 4.3% higher. The CPI | | | | (Dallas metro) is compared with San Francisco income. |
| fluctuates from time to time. When there is no inflation, | | | | You will have a better perspective if you adjust the |
| the CPI is zero and thus there is no rent increase. It | | | | AHI in Plano to the Cost of Living Index and then |
| could also be negative during a deflationary period | | | | compare with the AHI in the San Francisco Bay Area. |
| which in turn will translate to rent reduction for the | | | | For example if the AHI is $100K a year in Plano, it |
| tenant. | | | | would be equivalent to $185,000 in San Francisco. With |
| Cost of Living Index (COLI): COLI is a number that | | | | this adjusted income, you know that Plano is an upper |
| indicates the relative cost of living in various cities in the | | | | middle class area. |
| US with 100 being the average. Employers often | | | | |