Why Real Estate Is A Great Hedge Against Inflation

Inflation is a hot-button topic these days. If you have recently gone to the grocery store, or you’ve purchased gas for your vehicle in the last several months, you have seen the impacts of inflation. To make things even more concerning, most economists don’t believe that inflation rates are going to go back to normal anytime soon. One of the most important things that you can do as an investor is to hedge your finances against the impact of inflation. 

When you’re looking for ways to protect yourself from inflation, real estate is a great option. Discover more about the benefits of hedging your investments through the use of income-generating real estate today. 

What is Inflation?

Essentially, higher inflation means that the buying power of a single dollar is lower. Obviously, $1 is still worth $1, but when inflation rates are higher, it’s harder to purchase anything with that $1. You’ve probably already seen this concept in today’s economy. For instance, the cost of groceries has gone up by 11.4% between August of 2021 and August of 2022. This is an example of inflation. It’s important that you know how to protect yourself from the other financial ramifications of rising inflation.

What Type of Real Estate Should I Invest in?

When we’re talking about using real estate to hedge against inflation, it’s important that you know what type of real estate to invest in. The real estate industry is one of the most popular areas to invest in, thanks largely to the fact that it is so diversified. Successful investors know the importance of investing in different areas to protect themselves against market difficulties. 

When investing in real estate, it’s important that you know the best kind of real estate to rely on during periods of high inflation. Since high inflation rates lead to the diminished purchasing power of the dollar, you should try to avoid buying and selling properties. Currently, mortgage rates are also up, making it even harder for people to obtain the funds that they need to buy your properties. With that in mind, rental properties are a much better hedge against inflation. 

Rising Inflation Equals Rising Rent

Depending on the terms of your lease, you may be able to raise rent periodically based on a variety of factors. Obviously, it’s important that you only increase the rent associated with your property when the lease allows you to do it. However, there are some things that you can do when increasing your rental fees.

Put periodic rent reviews into your leases. This allows you to increase your rental rates before the lease expires. This is incredibly important when you’re renting out a smaller space such as a single-family home or a duplex. It’s also a good idea to have rent reviews built into the lease if you have a longer lease in place. If you allow a renter to sign a five-year lease on a single-family property that you own, you don’t want to have to wait five years to evaluate the amount you’re charging. 

Using rental properties to hedge against inflation is a great opportunity when the market makes it harder to buy and sell properties. The market value of your property may not change, but you can still make more money. 

Maximizing Intrinsic Value

Intrinsic value is defined as the measure of what an asset is worth. There is certainly no denying that real estate has higher intrinsic value because there is a limited amount of real estate available. One of the most important factors in the real estate industry is the fact that there is a limited amount of land. While a new home can be built, there is no way for people to create more land. This limited amount of land increases the intrinsic value of real estate.

In most cases, the demand for real estate doesn’t decrease, even when inflation rises. People will always need a place to live, regardless of inflation rates. Since it’s harder for people to buy homes during periods of high inflation, rental properties hold an even higher intrinsic value. This correlation further cements real estate as a great hedge against inflation. 

History Supports the Use of Real Estate

During the 1970s and 1980s, inflation rates were at an all-time high. The economy struggled to find a balance as the buying power of a dollar bottomed out. During that era, real estate investing was generally for the super-rich, but that’s not the case anymore.

Over the last 40 years, real estate has provided a 0% real rental growth rate, which makes it an ideal hedge against inflation. However, the fact that you need to evaluate which type of real estate that you’re investing in is underscored when you consider historical data. 

Even dating back to the recession of the 70s and 80s, multifamily properties with longer leases that included the ability to adjust rental rates periodically were better options than many other types of real estate. High inflation rates make it harder for businesses to operate, so you may struggle if you’re renting a commercial space to a retail outlet. However, providing tenants with a quality place to live is a great way to continue making money in real estate, even when the rest of the economy is struggling. 

There is a reason that 90% of the world’s millionaires have real estate investments somewhere in their portfolio. The most financially successful individuals in the world understand that the economy is constantly changing, and that includes inflation rates.

Protecting yourself from negative market trends such as rising inflation is a crucial aspect of experiencing sustained success and investing in real estate is a great way to do that. When you understand how to use real estate as a hedge against inflation, you can ensure that you’re still making money while other types of investments are struggling. 

To learn more about how passive real estate syndication investing can work for you click the link below and schedule a call with one of our team members to discuss any additional questions you may have and if were the right fit for you.