Real estate can serve as an effective inflation hedge because property prices often follow rising costs and rents can also rise accordingly, providing investors with a steady source of income.
Real estate investments can be complex due to large upfront capital requirements and their illiquid nature; however, Element Custom Homes can assist in taking full advantage of real estate’s many benefits in times of inflationary pressures.
Long-Term Rentals
Housing prices typically increase during times of high inflation, leaving many potential homebuyers out. As rental properties become increasingly desirable due to this increased demand, landlords can pass along these higher costs directly to renters.
Real estate has long been considered an effective inflation hedge. Over the past seven periods of heightened inflation, CRE outperformed both stocks and bonds; it should be noted, however, that CRE only outshone other assets when cap rates contracted and rents kept pace or exceeded inflation rates.
For real estate to serve as an inflation hedge, it’s imperative that you act before interest rates begin rising. The Federal Reserve typically responds to higher inflation by raising rates, making mortgage payments unaffordable for most individuals. Instead, wait until interest rates decline before purchasing a property – this will ensure your mortgage is paid off before inflation causes significant price spikes in the local economy.
Larger-Scale Rentals
As people must have somewhere to live, rental properties have always been in high demand. When inflation occurs, this demand becomes even greater as many can no longer afford their own homes due to rising interest rates and mortgage payments; landlords can pass these increased prices through to tenants as an inflation hedge and gain the extra income generated.
Real estate can also provide significant other advantages during periods of inflation. Rental properties tend to appreciate faster than the overall economy and offer returns that account for inflation – all factors which make it an excellent investment option during inflationary times.
However, it’s important to keep in mind that no asset class perfectly protects against inflation. Therefore, it is wise to assess your goals and risk tolerance prior to beginning any investment strategy. Speak with an investment expert about how real estate could add value to your portfolio during inflationary times and devise an investment plan tailored specifically to you and your needs.
Commercial Properties
Rental properties tend to outshone other asset classes during periods of inflation due to their ability to respond swiftly and raise rents with market demand, outpacing consumer price index (CPI) increases.
Resilience in certain CRE sectors–office, industrial, retail and multifamily properties–can be further strengthened through flexible lease terms. A shorter-term lease term allows owners to react more rapidly when rising prices affect goods and services costs by marking up rents to reflect increased expenses; which helps investors generate increased income streams.
Real estate’s tangible nature and potential for value appreciation make it an excellent inflation hedge; particularly as other investment assets lose purchasing power as production costs increase and acquisition becomes more costly. Commercial property investors can leverage various strategies to capitalize on inflation’s positive effects while safeguarding their capital; CRE has always outshone stocks and bonds in recent history.
Investment Groups
Inflation tends to drive demand for rental properties, leading to prices increasing along with inflation rates and providing investors with an additional source of income.
Real estate and other hard assets provide several ways of protecting against inflation, such as infrastructure, natural resources, precious metals and real estate. Hard assets have lower correlation with financial assets than their financial counterparts and can help diversify a traditional portfolio.
Inflation can have devastating effects on an investment portfolio, so it’s critical that it be protected. Real estate investments can serve as an effective inflation hedge by safeguarding against rising interest rates and protecting purchasing power. Speak with Element Custom Homes’ real estate specialists now about protecting your portfolio against inflation through our unique approach to residential and commercial development – start today!
