Hedge Against Inflation With These 3 Real Estate Investment Types

What Investments Do Well During Inflation?

The annual inflation rate in the United States is currently around 7.5%—the highest it has been since 1982.1 It doesn’t matter if you’re a cashier, lawyer, plumber, or retiree; if you spend U.S. dollars, inflation impacts you.

Economists expect the effects of inflation, like a higher cost of goods, to continue.2 Luckily, an investment in real estate can ease some of the financial strain.

Here’s what you need to know about inflation, how it impacts you, and how an investment in real estate can help.

 

WHAT IS INFLATION AND HOW DOES IT IMPACT ME?

Inflation is a decline in the value of money. When the rate of inflation rises, prices for goods and services go up. Therefore, a dollar buys you a little bit less with every passing day.

The consumer price index, or CPI, is a standard measure of inflation. Based on the latest CPI data, prices increased 7.5% from January 2021 to January 2022.1 A little bit of inflation is considered healthy for the economy, but 7.5% in a single year is high.

How does inflation affect your life? Here are a few of the negative impacts:

  • Decreased Purchasing Power

We’ve previously mentioned it, but when costs rise, your dollar will not extend as far as it once did. With a limited budget, you’ll be able to acquire fewer items and services.

 

 

 

  • Increased Borrowing Costs

The Federal Reserve is likely to boost the federal funds rate in order to combat inflation. As a result, new mortgages, vehicle loans, and variable-rate credit cards are likely to have higher interest rates.3

 

 

 

  • Lower Standard of Living

Wage growth tends to lag behind price increases. According to Moody Analytics, when adjusted for inflation, average weekly earnings in January were down 3.1% from a year earlier.4 As such, life is becoming less affordable for everyone. Inflation can force those on a fixed income, like retirees, to make lifestyle changes and prioritize essentials.

 

 

  • Eroded Savings

Inflation is considerably more damaging if you keep all of your savings in a bank account. The national average interest rate for a savings account is 0.06 percent as of February 2022, which isn’t nearly enough to keep up with inflation. And economists do not anticipate a significant increase in that rate.3

Moreover, one of the best ways to mitigate these effects is to find a place to invest your money other than the bank. Even if interest rates rise, they are unlikely to climb high enough to keep up with inflation. If you hoard cash, the value of your money will decrease every year and more rapidly in years with elevated inflation.

 

REAL ESTATE: A PROVEN HEDGE AGAINST INFLATION

So where is a good place to invest your money to protect (hedge) against the impacts of inflation? There are several investment vehicles that financial advisors traditionally recommend, including:

  • Firstly, Stocks

Some people invest in stocks as their primary inflation hedge. However, the stock market can become volatile during inflationary times, as we’ve seen in recent months.5

 

  • Secondly, Commodities

Commodities are tangible assets, like oil, livestock, and minerals. The theory is that the price of commodities should climb alongside inflation. But the classic choice–gold–hasn’t risen consistently during periods of inflation since the 1970s, according to data from Morningstar Direct.6

 

  • Thirdly, Inflation-Indexed Bonds

Treasury inflation-protected securities, or TIPS, are U.S. government-issued bonds that are indexed to the inflation rate. And, Bonds are considered low risk, but the returns they offer are generally low, as well.7

 

  • Lastly, Real Estate

Real estate prices across the board tend to rise along with inflation and often rise faster than inflation.8 That’s one of the reasons demand for real estate is soaring right now.9

We believe real estate is the best hedge against inflation. Owning real estate does more than protect your wealth—it can actually make you money. For example, home prices rose nearly 17% from 2020 to 2021, 10% ahead of the 7% inflation that occurred in the same timeframe.10

Plus, certain types of real estate investments can help you generate a stream of passive income. In the past year, property owners didn’t just avoid the erosion of purchasing power caused by inflation; they got ahead.

 

TYPES OF REAL ESTATE INVESTMENTS

Though there are myriad ways to invest in real estate, there are three basic investment types that we recommend for beginner and intermediate investors. Remember that we can help you determine which options are best for your financial goals and budget.

  • Primary Residence

If you own your home, you’re already ahead. The advantages of homeownership become even more apparent in inflationary times. Moreover, as inflation raises prices throughout the economy, the value of your home is likely to go up concurrently. At the same time, you’ve locked in a set mortgage payment for the next 30 years, so you’ll be immune to rising rental costs.

If you don’t already own your primary residence, homeownership is a worthwhile goal to pursue.

Though the task of saving enough for a down payment may seem daunting, there are several strategies that can make homeownership easier to achieve.

Contact us if you’re not sure where to begin with the home-buying process. Our team can help you find the strategy and property that fits your needs and budget.

Whether you already own a primary residence or are still renting, now is a good time to also start thinking about an investment property. The types of investment properties you’ll buy as a solo investor generally fall into two categories: long-term rentals and short-term rentals.

  • Long-Term (Traditional) Rentals

A long-term or traditional rental is a dwelling that’s leased out for an extended period.  For example of this is a single-family home where a tenant signs a one-year lease and brings all their own furniture.

Long-term rentals are a form of housing. For most tenants, the rental serves as their primary residence, which means it’s a necessary expense. This unique quality of long-term rentals can help to provide stable returns in uncertain times, especially when we have high inflation.

To invest in a long-term rental, you’ll need to budget for maintenance, repairs, property taxes, and insurance. You’ll also need to have a plan for managing the property. But a well-chosen investment property should pay for itself through rental income, and you’ll benefit from appreciation as the property rises in value.

We can help you find an ideal long-term rental property to suit your budget and investment goals. Reach out to talk about your needs and our local market opportunities.

  • Short-Term (Vacation) Rentals

Short-term or vacation rentals function more like hotels in that they offer temporary accommodations. A short-term rental is a home rented for fewer than 30 days. The property owner provides the furniture and other facilities, and many short-term rentals are now advertised on websites such as Airbnb and Vrbo.

A short-term rental can potentially earn you a higher return than a long-term rental, but this comes at the cost of daily, hands-on management. With a short-term rental, you’re not just entering the real estate business; you’re entering the hospitality business, too.

Done right, short-term rentals can be both a hedge against inflation and a profitable source of income. You also have an affordable vacation place for yourself and your family when the house isn’t being rented.

Contact us today if you’re interested in exploring options in either the long-term or short-term rental market. Mortgage rates are expected to rise, so you’ll want to act fast to maximize your investment return.

 

WE’RE INVESTED IN HELPING YOU

Inflation is a fact of life in the U.S. economy. Luckily, you can prepare for inflation with a carefully managed investment portfolio that includes real estate. Owning a primary residence or investing in a short-term or long-term rental will help you both mitigate the effects of inflation and grow your net worth, which makes it a strategic move in our current financial environment.

If you’re ready to invest in real estate to build wealth and protect yourself from rising inflation, contact us. Our team can help you find a primary residence or investment property that meets your financial goals.

The above references an opinion and is for informational purposes only. It is not intended to be financial advice. Consult the appropriate professionals for advice regarding your individual needs.

 

Sources:

  1. Bloomberg –
    https://www.bloomberg.com/news/articles/2022-02-10/u-s-inflation-charges-higher-with-larger-than-forecast-gain
  2. CNN –
    https://www.cnn.com/2022/01/01/economy/inflation-prices-2022-preview/index.html
  3. CNBC –
    https://www.cnbc.com/2022/01/26/the-fed-sets-the-stage-for-a-rate-hike-heres-what-that-means-for-you.html
  4. Reuters –
    https://www.reuters.com/business/us-consumer-prices-rise-strongly-january-weekly-jobless-claims-fall-2022-02-10/
  5. NBC News –
    https://www.nbcnews.com/business/markets/market-slide-dow-falls-700-points-sp-enters-correction-territory-rcna13304
  6. CNBC –
    https://www.cnbc.com/2021/12/20/gold-is-losing-its-status-as-an-inflation-hedge-two-traders-warn.html
  7. Morningstar –
    https://www.morningstar.com/articles/1079158/why-are-inflation-protected-bond-funds-losing-money
  8. The Washington Post –
    https://www.washingtonpost.com/business/2022/01/04/heres-how-inflation-could-affect-your-next-real-estate-move/
  9. Bloomberg –
    https://www.bloomberg.com/news/articles/2022-01-24/is-real-estate-a-good-investment-hedge-against-inflation-what-the-experts-say
  10. CNN –
    https://www.cnn.com/2022/01/20/homes/us-nar-home-sales-december-and-2021/index.html
About the Author
Kim Devlin
Kim Devlin is Your St Augustine Realtor. A Relocation Specialist serving Northeast Florida, St Johns County and Flagler County. She enjoys sharing real estate tips and local insight on communities and living in St Augustine Florida. Tune in weekly and be sure to subscribe to her monthly newsletter.