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Why Real Estate is a Good Hedge Against Inflation

Economists have been warning about inflation for the past decade. While the inflation hasn’t come to fruition as predicted, with the average rate over the past ten years being 1.8%, the threat of inflation has been a recent topic of financial news lately, largely due to the consequences of the COVID-19 pandemic. Additionally, economists are worried over the major infusion of cash from stimulus money.

It is a safe bet that we will see some level of inflation in the coming months. But it’s hard to predict whether it will be short or long term. No matter the size and duration of the coming inflation, real estate is one of the best hedges against it. 

What is Inflation?

We hear the word all the time, but many people may struggle to define the term solidly. The simplest definition of inflation is an increase in the price of goods over a set period of time. For example, if a coffee tin costs $10 in 2011 and inflation increased by 1.8% over the decade, that same tin now costs $10.18. The problem is you don’t survive on coffee alone. And that rate affects most goods and services. So when it compounds, even eighteen cents can add up over a month’s worth of groceries. The percentage over the past decade has been relatively negligible. But if it were to increase to say even 5 or 10%, it would make a dent in your bottom line. Now, instead of $10.18, that coffee is $11, and that multiplied over an entire grocery bill will sting.

How Does Home Appreciation Differ From Inflation?

Before we talk about how to combat inevitable inflation, we should first clarify that home appreciation is different from inflation. Appreciation is an increase in the house’s price over time in relation to supply and demand. And has nothing to do with currency inflation. While appreciation is a great reason to own real estate of any kind, it is not a direct hedge against inflation. 

Real estate is a good hedge for several reasons; the first is that rental income is semi-passive — passive income is always great when your dollar isn’t going as far. When inflation hits, banks can get stingy. This means that people who may have been in the market to buy a home must continue to rent, and more renters mean an increase in the price of rent. Thanks to the increase in the price of goods, it also means that new construction is down. This leads to a supply issue that will usually raise prices if you need to sell for a cash infusion of your own. 

Don’t Wait to Start Investing

When inflation hits, it will be hard to get loans on new properties even if you’re in good standing. So now is the time to start the process of investing in real estate, whether it’s commercial, multi-dwelling, or single-family. The longer the period of inflation, the more interest rates will rise, which will give you less buying power. Even if it doesn’t happen, you will have an investment that will maintain or increase in value over time. And become exponentially more valuable as income when the property is eventually paid off.

If you are thinking about investing in real estate to start a new revenue stream, contact us today to get started. Even if you aren’t quite ready to buy, you can still get ahold of us to answer any questions you have about the market and the process of purchasing properties as an investment. 

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