Worried about Inflation? Real Estate Could Be the Answer
Inflation can be a serious problem for investors who are looking to build wealth. Along with potentially worsening the value of your 401(k) and similar retirement accounts, your money essentially won’t be worth as much. It’s also common for certain investments like fixed-rate debt securities to perform poorly during inflationary periods.
If you’re worried about the effects of inflation and want to make sure that you and/or your child’s futures are protected, it’s highly recommended that you create a real estate portfolio. Many investors use real estate investments as a hedge against inflation. The following takes a closer look at why real estate may be the answer to inflation.
What Does Inflation Refer To?
Inflation involves the purchasing power of a currency declining over a period of time. For consumers, inflation tends to result in the price of goods and services going up. What this means is that a single dollar doesn’t go as far during inflationary periods. Over the past year, inflation has occurred at a high rate, which has made it more difficult for some investors to build their wealth. However, there are some investments that have proven to be highly advantageous when made during inflation, the primary of which involves real estate.
How Real Estate Protects Against Inflation
Adding real estate investments to your portfolio should help you protect against inflation while also allowing you to continue building your wealth.
Your Mortgage Will Eventually Cost Less
If you want to use real estate investments to protect against inflation, purchasing a home that comes with a standard fixed-rate mortgage should help you achieve your goal. When you purchase a home with one of these mortgages, the monthly payment that you’re expected to pay is based entirely on what the dollar is valued at when you purchase the home.
While you pay off your home over a 15-year or 30-year period, you’re essentially paying less as inflation continues to rise. Let’s say that inflation occurs at a rate of 2% every year. In this scenario, a $900 monthly mortgage payment in 2022 will be considerably cheaper in 2030 when inflation has risen by upwards of 16%. In 10 years, your monthly payment shouldn’t be as challenging to pay as it is now.
Inflation Can Damage Retirement Accounts
The main problem with inflation involves damage that can be done to retirement savings and accounts. When inflation occurs, the purchasing power of the money that has been placed in your retirement accounts will decrease. Even though some years have standard rates of inflation, there are times when inflation increases at an alarming rate. For the 12 months ending in June 2022, the inflation rate throughout the U.S. was just over 9%.
Any money you’ve placed in your retirement accounts over the past 10 or 30 years will be less valuable because of inflation. Real estate investments allow you to bypass these issues. Properties tend to increase in value regardless of how much inflation has increased. If you want to reduce the long-term effects of inflation with your savings accounts, 401(k) plans, and IRAs, you should consider investing in real estate.
Income-producing Properties Allow You to Benefit from Inflation
Likely the most advantageous reason to invest in real estate before or during an inflationary period is because income-producing properties allow owners to meet or surpass the rate of inflation. When the inflation rate increases, rental property owners have the opportunity to increase rents for any tenants who live there.
In fact, rents have already increased by upwards of 20-30% in some cities throughout the U.S. If you’ve purchased this property with a fixed-rate mortgage, your loan payment will remain the same even as you collect higher rents, which makes it possible to earn a higher cash flow while inflation is ongoing. Keep in mind that taxes, insurance, and other expenses will inflate as well. However, most income-producing properties will bring in higher rental income when compared to expenses.
If you’ve been working on building wealth but are now worried about what will happen to this wealth during an inflationary period, you can effectively mitigate these concerns by investing in real estate. The right investments allow you to earn income by renting out your property or waiting for your home to appreciate in value.