During economic inflationary periods, real estate is considered to be a core investment as it can hedge your portfolio against inflation while still balancing your exposed risk. As one of the best ways to fight inflation, many investors purchase real estate to preserve their portfolio while still growing their capital. Here are some key tips for real estate investors during times of inflation:
What Causes Inflation?
To understand how inflation can affect your investment goals, you must first understand how monetary inflation is caused. There are several reasons to why an economic system might be experiencing inflation, but the most likely causes are:
- Supply shrinks for a product while demand stays the same, leading prices to rise
- Demand for a product or service rises, while supply stays the same
- Central bank policy (interest rates)
- Printing more money
Typically, inflation is measured by the Consumer Price Index (CPI). This statistic tracks the price movement in several sectors such as food, clothing, cars, commodities, and gas. Another measurement of inflation is the Wholesale Price Index (WPI). This index measures how prices from wholesalers and manufacturers change. These two statistics gives us a good understanding of what way price is moving and how fast inflation is occurring.
Effect of Inflation on Your Portfolio
Investing during inflationary periods can mean several things for your portfolio. Here’s some pros and cons to investing during economic inflation:
- Preserve portfolio worth
- Diversify holdings
- Maintain income’s buying power
- Increase exposure to risk
- Divert from long-term goals
- Overweight portfolio in some cases
Depending on your portfolio’s needs, your tolerance of risk will vary. Be careful not to hyper focus on inflation in your portfolio as this could divert you from your long-term investing goals. Always remember to keep your original goals in mind while preserving and growing your portfolio’s value.
How Inflation Can Affect Real Estate
There are several ways that inflation will have consequences for your investments in real estate, here are some of the most noticeable affects:
Demand rises because it’s an income generating asset
Real estate prices will rise during times of inflation because investors will be looking for assets that can generate a return beyond the rate of inflation, thus, increasing the demand for real estate.
There is limited amount of real estate on the market
There is a limited amount of real estate and land available for purchase on the real estate market compared to fiat currency. If inflation is growing due to money printing, real estate prices will rise naturally.
Housing construction costs can increase
The increase in cost of goods during times of inflation will have its effects on new construction costs and home repairs. Your fix and flip’s construction and renovation will cost more, leading you to increase the selling price.
How to Use Real Estate as a Hedge Against Inflation
Wondering how to position yourself to use real estate as a hedge against inflation in your portfolio? Here are some key tips for real estate investors during inflation:
Increasing income (rent)
Increasing rents is an option for investors that want to protect their real estate investment from inflation. A 20$ increase every year over the next 10 years could help to hedge you against projected inflation.
Real estate tends to appreciate year after year, giving you a good hedge against inflation. Depending on your location, appreciation rates will vary. From 2020 to 2021, the national average for real estate appreciation was 17.54%.
While you investment is appreciating in value, your debt is decreasing in value with inflation. Even though your overall payment will remain the same, the value of your payment will decrease overtime, therefore depreciating your debt.
Capitalize on cheap money
Depending on the current interest rates, investing in real estate gives you a hedge against inflation when interest rates are low. Even though interest rates are currently rising, they are still at historic lows, giving you great opportunities in the market.
RCN Capital offers short-term and long-term financing options for real estate investors. Whether you are looking to fix & flip properties or hold properties for rental income, RCN has flexible options that are suited to your needs. Connect with us today to discuss your next real estate investment.