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. Enjoy the video, read the article and then book a consultation so we can develop a plan for you to combat infaltion with real estate!
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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.
Inflation can get hit you where it hurts the most, an erosion of your savings and financial standing. Given below are some of the ways that inflation can badly impact your life.
- Decreased Purchasing Power
As prices rise and your dollar in hand remains constant, you can buy less and less of your required stuff. Your budget becomes limited and you have to buy fewer goods and services accordingly.
- Increased Borrowing Costs
To keep inflation in check, the Federal Reserve raises the interest rates to make the cost of funds dearer. This has a spiral rate, pushing up interest rates on new mortgages, car loans, and variable-rate credit cards. If you are buying a house, be ready to pay higher interest on your mortgage loan.
- 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
Putting all your money in the bank is damaging if you are to beat inflation. The interest rate on savings hovers around 0.06% in banks, not enough to keep up with inflation. This trend is expected to continue as bankers and economists do not think that savings interest rates are going to be any higher than this in the future. Hence, the value of your savings gets eroded by high inflation.
So, how do you get around this issue? Money in the bank is meaningless if its value is going to fall over time. Hence, one of the best ways to beat inflation is to find avenues for investment that give returns that are higher than the rate of inflation.
Given here are some of the more common investment opportunities and what each one holds for you.
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:
- 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
- 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
- Inflation-Indexed Bonds
Treasury inflation-protected securities, or TIPS, are U.S. government-issued bonds that are indexed to the inflation rate. Bonds are considered low risk, but the returns they offer are generally low, as well.7
- 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
There are several types of real estate investments but there are three of them that really matter. These are the ones that we generally recommend to beginners and intermediate investors just testing the real estate waters. We can help you evaluate which type of investment would perfectly fit your financial goals and budget.
- Primary Residence
If you have already gone through a search for homes and have bought one, you are already ahead of the game. During inflationary times, the advantages of homeownership become even more apparent. As inflation rises, the value of your home will also appreciate over time, Rental costs will not affect you since you have already locked into a fixed mortgage payment over 30 years. For those with flexible mortgage rates, inflation can be worrying as interest rates rise simultaneously.
If you have not yet gone through a house sale settlement to acquire property, now is the time to do so before inflationary trends become too hot to handle and mortgage rates touch the sky.
For many aspiring homebuyers putting together the down payment can be challenging when they look for a property for sale to invest in. However, get in touch with us and our team will handhold you through the whole process of buying a house.
Regardless of whether you are renting or already own a primary residence, think seriously about investing in residential property. The types of investment properties fall into two distinct categories as follows.
- Long-Term (Traditional) Rentals
This is the more common form of rental where you lease out your property for an extended period. For instance, a tenant signs a one-year rental lease for a single-family home and brings all their furniture. For most tenants, this is their primary residence and hence they will mostly renew their lease whenever it falls due.
This is to your advantage as you are assured of a stable income even during uncertain high inflation times. However, when you search for homes for long-term rentals, factor in expenses for maintenance, insurance, property taxes, and repairs. You must also have a strategy for managing the property yourself or hire the services of a professional property manager if you have several rentals to handle.
If you are buying a house with long-term rental plans, reach out to us. We will guide you about the latest market trends and investment opportunities that will help you maximize the returns on your investment.
- Short-Term (Vacation) Rentals
Short-term or vacation rentals function more like hotels in that they offer temporary accommodations. A short-term rental is defined as a residential dwelling that is rented for 30 days or less. The furniture and other amenities are provided by the property owner, and today many short-term rentals are listed on websites like 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. As a bonus, when the home isn’t being rented you have an affordable vacation spot for yourself and your family!
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:
- Bloomberg –
https://www.bloomberg.com/news/articles/2022-02-10/u-s-inflation-charges-higher-with-larger-than-forecast-gain - CNN –
https://www.cnn.com/2022/01/01/economy/inflation-prices-2022-preview/index.html - CNBC –
https://www.cnbc.com/2022/01/26/the-fed-sets-the-stage-for-a-rate-hike-heres-what-that-means-for-you.html - Reuters –
https://www.reuters.com/business/us-consumer-prices-rise-strongly-january-weekly-jobless-claims-fall-2022-02-10/ - NBC News –
https://www.nbcnews.com/business/markets/market-slide-dow-falls-700-points-sp-enters-correction-territory-rcna13304 - CNBC –
https://www.cnbc.com/2021/12/20/gold-is-losing-its-status-as-an-inflation-hedge-two-traders-warn.html - Morningstar –
https://www.morningstar.com/articles/1079158/why-are-inflation-protected-bond-funds-losing-money - The Washington Post –
https://www.washingtonpost.com/business/2022/01/04/heres-how-inflation-could-affect-your-next-real-estate-move/ - Bloomberg –
https://www.bloomberg.com/news/articles/2022-01-24/is-real-estate-a-good-investment-hedge-against-inflation-what-the-experts-say - CNN –
https://www.cnn.com/2022/01/20/homes/us-nar-home-sales-december-and-2021/index.html
