Why You Should Invest in Real Estate Amidst Soaring Inflation
Real estate is frequently suggested as an inflation hedge. But is that true, and if so, what exactly does “hedge against inflation” mean?
In this article, we’ll look at how and why inflation happens and why real estate investors should invest in real estate in the face of rising inflation.
What is inflation in real estate investment?
Inflation is defined as a loss in the buying power of money, which is represented by a rise in the price of goods and services in the economy. As a result, as inflation rises, every peso you earn loses value, reducing your capacity to spend.
Excess money supply, supply and demand shocks, and the public belief that prices would rise are all common drivers of inflation.
Real estate investors utilize real estate as a hedge against inflation by taking advantage of low mortgage interest rates, passing on growing expenses to renters in the form of higher rents, and profiting from rising house values over time.
How Does Inflation Affect the Real Estate Industry?
Rents Will Rise
In the best-case scenario for investors, landlords will be able to pass on rent hikes to renters. In an economy where business expenses of all kinds are growing, renters may be ready to tolerate bigger yearly rent increases than they would in a period of moderate inflation. If, on the other hand, inflation is driven by an increase in the cost of products, landlords may not have as much influence to negotiate higher rents. Standard inflation provisions in leases can be established to safeguard landlords’ interests by automatically linking rent to the consumer price index.
The cost of real estate will rise.
Real estate investing becomes more enticing during periods of rising prices due to its reputation as a hedge against inflation. Investors do not want their money to lose value by sitting in cash, so they hunt for investments that will outperform inflation. In this self-perpetuating cycle, more funds are pursuing houses than there are available to buy, driving up prices. One drawback here is that an increase in borrowing rates might diminish investors’ purchasing power when bidding on homes.
Inflation also provides a very practical reason for property values to rise: construction materials are more expensive today than they were a year ago, implying that the replacement value of any existing building is increasing. Property prices benefit from this fact.
Differences Between Real Estate Investing and Other Investments
As a direct real estate investor, you play an active part in the management of your property. A business property’s strategy and direction can be shaped by the owner. That is in contrast to stock ownership, which encourages you to play a passive role and allow others to make the decisions.
Many real estate investors prefer the tactile part of real estate property since they are physical properties – you can touch, feel, and tour homes, which is not possible with shares. Many real estate investors also benefit from the tax savings that come with owning real estate.
In terms of functioning as an inflation hedge, real estate has historically outperformed equities. Commercial real estate values are expected to grow in tandem with general prices, .which cannot be true for equities.
What exactly is an inflation hedge?
An inflation hedge is an investment or asset that retains or grows in value during periods of inflation. An inflation hedge’s purpose is to protect the investor from a drop in the buying power of money. This happens when the prices of products and services skyrocket. The ideal hedge not only compensates for the mathematical losses caused by inflation but also outperforms it in terms of growth.
The Benefits of Investing in Real Estate as an Inflation Hedging Strategy
Nevertheless, the real estate market may provide a far more steady source of investment income that can be used as a hedge against the impact of inflation or the rapid swings in a volatile stock market. Many investors are turning to real estate as a source of regular, predictable, and profitable returns in the short and long term.
As a real estate investor, you may achieve substantial profits on the correct types of property and benefit from these four advantages that real estate investments in your portfolio will provide against negative economic and stock market trends.
Sticking to popular investment areas will protect you from inflated homeowner premiums.
When homeowners compete for real estate in attractive regions or communities, investment properties, whether commercial real estate or residential properties, prices usually rise in tandem with demand. While paying more on a property as a long-term home may make sense for a house buyer, the higher costs aren’t as appealing to investors looking to profit from resale or rental property. When you stick to places that are popular with investors that have similar motives and cash flow as you, you’ll find that values remain more stable and are less influenced by higher premiums driven up by homeowners. Competing with investors (rather than competing with homeowners) can assist protect you from inflation and maintain your figures on your investment property in a profitable range.
Many investment properties may be more resistant to a recession.
Investing in the stock market may provide significant rewards in a robust economy, but it can also be exceedingly dangerous when the market has a slump or even a recession. In a turbulent market, some of your greatest investments can swiftly fall, and this is the risk you take when investing in stocks.
However, real estate investments (particularly in commercial properties and rental properties) are significantly less prone to losses during recessions since they supply solutions or services that people will always require regardless of the status of the economy (such as food, gas, housing, convenience items, etc).
Long-Term Performance of Publicly Traded Real Estate Investment Trusts or REITs
Publicly listed REITs and mutual funds can be especially beneficial over the long run for real estate investing by providing you with additional investing options while requiring less cash. A real estate investment trust may diversify your portfolio, and while they are more prone to losses during recessions, the liquidity of these assets often balances out in terms of gains over the long run.
The rental property serves as a solid investment foundation.
Rental properties have long been a popular and dependable source of investment income, which may be enjoyed in both the short and long term, depending on your approach. Though a real estate investment has intrinsic costs such as mortgage payments, property taxes, and continuing maintenance, a significant percentage of these expenditures may be offset by the rental you make on the property, with an excess that comes in every month as positive income. The ultimate profitability of rental properties is realized after the mortgage is paid off, but this form of investment may generate positive cash flow, providing a stable basis for your portfolio.
In addition to income flow, rental properties provide the benefit of property appreciation, as the value of the property improves over time owing to improvements made to it. If you intentionally purchase a property in a developing, attractive neighborhood and carefully select renters who are loyal and trustworthy, you may typically experience rapid appreciation.