Why Inflation Shouldn’t Stop You from Investing In Real Estate in 2022
When many people hear the word “inflation,” they automatically assume the worst. The term has become synonymous with rising prices, a failing economy, and any other number of issues that cause investors to take their money, bury it in a personal savings account, and wait for things to improve. However, inflation doesn’t always have to be seen as a negative.
If you’re an established real estate investor, or you’re looking to get into the industry for the first time, you shouldn’t let inflation rates keep you on the outside looking in. In fact, there are some cases where inflation can improve your odds of finding success in certain types of real estate investment classes.
What is Inflation?
Before we understand why inflation shouldn’t keep you out of the world of real estate investing, it’s important to understand what inflation is. Many people hear the word “inflation” and automatically assume that it’s what causes gas prices, grocery prices, and the cost of other goods and services to increase. While those are certainly some symptoms of increased inflation, it goes beyond that. At it’s very core, inflation is the decrease in purchasing power of a dollar. For instance, if you consider the average annual inflation rate of 1.8%, the appliance that you purchased for $400 a year ago would cost you around $407.20 today.
How Does Inflation Impact Real Estate?
Since inflation involves the purchasing power of the US dollar, it’s easy to see that it will also have an impact on real estate. In most cases, inflation wreaks havoc on three industries: financial, utility, and energy sectors are the most heavily impacted by inflation. However, the impact that is felt by the real estate industry when people who depend on those industries for their income are unable to obtain the mortgages that they need to purchase a home.
The price of rental properties, particularly multifamily housing, goes up considerably during points of high inflation. During seasons of high inflation, it can be incredibly difficult to obtain a mortgage, as the rates are less favorable. When lenders have less favorable rates, they are required to set forth stricter criteria, making it more difficult for the average American to get a mortgage. When this happens, those people look for rental opportunities, which makes the market ideal for investors.
Investors also notice an increase in the value of their properties during periods of high inflation. When the cost of goods increases, the cost of new constructions goes up as well. If the prices of newly constructed homes go up, people will look to existing homes if they can get a mortgage. This greatly favors investors who already own single-family properties.
How to Invest During High Inflation
There is no such thing as a risk-free investment. When you put your money into any type of market, you run the risk of losing it. However, there are some steps that you can take that allow you to put yourself in a position to hedge your investment against the dangers of inflation and other market factors.
Rental properties of any kind are generally a wise investment during periods of high inflation. As we’ve already discussed, when people are unable to get mortgages to purchase a home, they still need a roof over their heads. This means that the demand for rental properties goes up during high inflation periods.
Investors have also found success investing in real estate notes during seasons of high inflation. Obviously, note investing is easier for more established investors, as you are purchasing the loan from the lending institution. Banks often look to unload existing mortgages during periods of higher inflation so they can offer more favorable rates to new clients.
Finally, real estate investment trusts, also referred to as REITs are a great tool for investors during periods of high inflation. REITs allow you to disperse your investment across a number of different properties. Since diversification is key during any type of market, it’s a great way to hedge yourself against inflation.
There is no way to completely avoid inflation, as it’s a natural part of a cyclical market. However, the presence of inflation doesn’t mean that you need to withhold your funds. Understanding how to identify wise investments during inflationary periods is a vital part of finding lasting success.