Inflation is the name for weakening purchase power in currency and assets. It’s affected the market sharply in the pandemic era. Fortunately, however, real estate investments are uniquely primed to be resistant to inflation.
All the same, you’ll need to understand how inflation affects your real estate investments and how to manage it for greater success. Here, we explore both these topics to help you make the most of an inflated economy.
How inflation impacts real estate investments
Put simply, inflation is a bad thing for just about everyone. However, real estate investors are better protected than most due to the nature of property and housing. This is great news since inflation rates have risen to 7.9%, the highest on record since 1982.
Even so, inflation will impact the real estate investments you hope to make in the current market. Primarily, these impacts come in three forms. These are:
1. Asset Prices
The price of properties themselves tend to rise during inflationary times. We’ve seen this occur recently across the nation, where the Case-Shiller U.S. National Home Price Index has jumped 18.6%.
Typically, this occurs because inflationary times are offset by low-interest rates supported by the Federal Reserve. This has certainly been the case over the course of the pandemic era. However, mortgage interest rates are now rising, too.
2. Mortgage Rates
As inflation takes its toll, mortgage rates rise over time. This limits the buying power of investors, who can’t get as good of deals on financing products in a tight market.
The idea is to protect real estate assets against unscrupulous borrowing practices, but the impact is a higher barrier of entry to investment. We’re seeing this now, with average mortgage rates rising to nearly 5%.
3. Construction Costs
Materials and labor are then impacted by inflation, as well, making for a more expensive construction process. This has been especially prevalent during the pandemic, since COVID-19 forced the shutdown of many manufacturers and limited the availability of labor. With higher costs across the board, construction expenses cut into revenues associated with developing real estate assets. In turn, it’s harder to break into the market as an investor.
However, investing in real estate can still be a means to combat the impact of inflation and build a healthy nest egg for financial freedom down the line. All it takes is the right management approach.
Managing inflation for real estate investments
Real estate is a great investment choice in any economy because everyone will always need housing. You can make the most of property investments no matter how bad inflation gets by following a few helpful strategies.
For a better approach to portfolio management in a highly inflationary period, explore these considerations:
1. Make a long-term plan.
Investing at a time of high inflation can be a great strategy since real estate values and rent prices typically track with inflationary rates. As a result, your money continues to serve you at satisfactory rates.
However, you want to implement a long-term strategy for managing the property or selling it off. It may be in your best interest to sell when inflation comes down. However, holding it long-term may also benefit your portfolio.
Align your goals with an investment schedule, and consider other methods of growing your portfolio with property.
2. Invest in the right Real Estate Investment Trust (REIT)
An REIT is a collective ownership of properties that yields you revenue for contributing funds. By investing, you won’t own properties outright but you’ll have a stake in them that can net you income. This makes for a lower barrier of entry since you won’t need enough money for a full downpayment.
It’s important to find the right REIT for your goals and budget, however. High-demand, high-yield assets tend to have lower share prices, for instance. Then, operating expenses and property taxes cut into revenue.
Find an REIT with shares and potential that work for you. Allocating between 4%-15% of your portfolio to these assets can be a lucrative investment strategy in any economy.
3. Reinvest revenues.
The money you earn from owning and operating property won’t serve you well sitting in low-interest savings accounts. You’ll want to reinvest.
Whether you chose REITs, additional properties, or other types of investments, the important thing is to put your money wherever the yield is higher than the rate of inflation.
Speak with a financial consultant before making any big investment decisions. Real estate agents and property managers can also help you make the most of property investments in an inflationary economy.
For more lucrative investment strategies, explore 208.properties' real estate insights. Greater value awaits.
