What Happens to Real Estate During Inflation?
Inflation, the economic term which refers to the devaluation of your money, can sound like a blaring car horn to the ears of many investors. However, while its consequences are simple enough (a rise in the cost of goods and services) it's also comprised of many less obvious negative aspects as well.
For example, the direct effect that it has on the real estate market and housing prices (which includes impacting the many financial aspects involved in many kinds of real estate investment, from commercial real estate to single-family rentals).
Below, we describe these consequences in fuller detail and offer a solution that will allow investors to avoid the consequences of an inevitable rise in the inflation rate.
Three Consequences of Inflation on Real Estate Investment
1) Increase in Cost of Home Construction
Remembering that inflation refers to a rising cost in the price of everyday goods, think of all the materials it takes to build a new home: from concrete and bricks to drywall and stucco, the list is quite long. Inflation means that all of these required materials just became more expensive for homebuilders.
2) Rising Home Prices
Consider the consequence of higher homebuilding costs once more: as these put a greater financial burden on homebuilders, they have little recourse but to make up for it with higher listing prices for just-built properties. Unfortunately, this isn't the only reason inflation causes real estate prices to rise. When the Central Bank increases the money supply in the economy (a primary cause of inflation), house prices automatically increase.
3) Decline in Financed Home Purchases
Another effect inflation has on the housing market and real estate investing involves debt. When inflation rises, causing money to become more expensive to borrow, people don't borrow as much of it; they may not even borrow any at all. This results in a chain reaction of fewer mortgage-financed home purchases, which may flatten economic growth.
Why You Need a Hedge Against Inflation
With inflation slowly rising, now is an ideal time to invest in an asset class that can provide a hedge against it.
By doing so, you're getting some inflation protection for your portfolio with a smart investment expected to maintain or increase its value over a specified period of time. Residential real estate even tends to increase in value when the inflationary period is prolonged.
So, while purchasing office equipment for your business fails the test of appreciation, investing in real estate passes with flying colors (a fact that we're sure you can appreciate!).
Although, Mynd can help you make purchasing office equipment for your real estate investment business easier using tax deductions, 100% bonus depreciation, and the 20% qualified business income deduction.
Why 2021 is a Great Year for Investing in Rentals
At the beginning of 2021, there were indicators that the real estate market would be strong because of high demand, low supply, and the low-interest rate of mortgages. As a result, it was easy to identify the top places to invest in real estate in 2021.
As the demand for homes increased, property prices increased as well. Inflation expectations caused by rising prices are sometimes met by a country's central bank introducing a higher interest rate to slow growth to protect the currency’s purchasing power and prevent higher inflation and hyperinflation (when there is deflation, banks often have lower interest rates). Banks may also institute higher mortgage rates to increase their profit by providing mortgages to pay for more expensive properties.
Many people can't afford to buy homes at higher prices, even if the interest rate for a fixed-rate mortgage remains low. So if there's a greater demand for rentals, then the vacancy rate will go down. If you're an investor, that may mean your rental property can even see increased rental rates, which is a variation on the amount you charge per square foot, per room, per apartment, per year.
With greater cash flow, you can scale your investment property portfolio. And Mynd can help you invest nationwide. If you're worried about high inflation, investing in real assets like real estate can protect you because real estate is often not as volatile as the stock market. And if your investment portfolio is geographically diverse, then you’ll be a more resilient investor by not putting all your eggs in one basket.
If you don’t want to invest in real estate directly, consider investing in a REIT (real estate investment trust). A REIT is a company that invests in real estate or finances real estate projects that you can invest in on a public stock exchange as you would with a stock.
Schedule a Consultation Today
Having an effective inflation hedge in place can directly influence your future finances-so don't allow rising inflation rates to undermine your nest egg.
To determine your best options for creating an effective hedge against inflation, contact Mynd today.