With the government warning consumers that inflation is on the horizon, many real estate investors are wondering what that means for their business and assets. Inflation refers to the rate of increase in prices over a given period of time, but what impact does it have real estate?
Real estate is considered to be a “staple good”, which are specific goods that are consumed by people on a regular basis. These types of goods are heavily impacted by inflation and are generally expected to appreciate. This means that during periods of inflation, property assets in your portfolio will simultaneously increase in value. Compare that to something like a car, which is classified as a “convenience good”, which actually depreciates in value over time.
So what can investors do to hedge against inflation and increase their returns?
During times of inflation, investors can think strategically about new properties and properties in their portfolio and their various exit strategies. When inflation is rising, it’s often better to hold on to properties rather than sell them. Refinancing your properties to lock in low interest rates, and maintaining them as rentals will allow you to bring in higher income while the overall value of your assets appreciate with inflation. Then, when the economy begins to rebalance, your properties are worth more than they were before, and you can make a higher profit when you’re ready to sell.
Historically, we’ve seen that while many areas of the economy suffer from inflation-related side effects, investors focused on residential real estate tend to fare quite well during times of inflation. If they know how to utilize their partnerships and financing options to their advantage, they can hedge against the effects of inflation and come out with higher returns and a more profitable portfolio.