By December 2021, the world was already experiencing a seven percent inflation rate, the highest in 40 years. Things are not improving because the first quarter of 2022 has already seen a continued rise in the cost of commodities and services. The purchasing power of the dollar continues to drop significantly. The high cost of living is driving people to be more investment conscious. But what does this mean for those in the real estate industry?
Contrary to what many people believe, the rise of inflation will not affect the value of your property. Commercial properties tend to appreciate; hence, they are not affected by inflation. However, industry growth may become a little slower due to the high cost of borrowing, high cost of operational expenditures, and high mortgage rates. But all these don’t change the fact that real estate has always been an inflation hedge.
For real estate sellers and investors, inflation is the best time. As inflation continues to rise, property values also increase. These are the periods when landlords will easily charge higher on rental leases and sell their properties at higher costs.
Why Is Real Estate Considered a Hedge Against Inflation?
You’ve heard experts mentioning how housing prices have always outperformed inflation. And there’s a good reason for that: people need shelter. It’s a basic human necessity. Unlike other investments, such as stocks and bonds, people can’t just ditch their homes and rent an apartment if the market crashes.
There are three main reasons real estate is considered a hedge against inflation:
- Unlike other investments, people need a place to live, so there is always a demand for housing.
- Rental prices rise with inflation
- The land on which a house is built usually appreciates in value over time.
Therefore, inflation effects on real estate have more positives than negatives. Real estate investors who make wise purchases build more wealth at this time rather than losing.
Inflation Effects on Real Estate
Increase in Rental Rates
In periods of high inflation, the demand for rental properties also increases. The first reason behind this is that people are not able to afford to buy a new home during these times and prefer renting instead. Getting a mortgage at this time is harder than usual; hence, not everyone can buy a house.
As an investor, this is good news because you can charge higher prices for your units. If you own a property that is in high demand, you can easily raise the rent without worrying about vacancy rates.
Moreover, since more people are looking for rentals, you will have a better chance of finding quality tenants. You can be choosier about who you want to rent to and screen them based on their income and employment history. Renting is even easier because companies like EZlandlordforms.com provides a state-specific lawyer-written rental agreement just for landlords, https://www.ezlandlordforms.com/documents/rental-lease-agreements/. There’s no better time to enjoy your rental income than this period.
Increased Property Values
As inflation continues to rise, so do property values. This is good news for real estate investors because their investments are becoming more valuable. The value of your property will go up over time, which is why investing in real estate is often considered a wise decision.
If you ever decide to sell your investment property, you can rest assured knowing that you’ll get a good price for it.
However, you must open your eyes and not invest in lazy equity. You don’t want to purchase a property that doesn’t have the potential to increase in value. You want a property that will work for you, not one that will likely drain you financially.
High Borrowing Costs
During inflation periods, the cost of borrowing tends to rise due to increased interest rates. Central banks try to combat the effects of inflation by increasing interest rates. The increase in interest rates also affects home loan rates, making it hard for consumers to get mortgages. Instead of buying homes, people turn to rentals. The demand for rentals goes up, which means that the prices of these units also increase.
If you’re thinking of investing in real estate, it’s best to do so when borrowing costs are low. This way, you’ll be able to get a good deal on a property and won’t have to worry about high-interest rates eating into your profits.
Increase in Housing Construction Cost
As the prices of goods increase, the cost of machinery, building materials, and wages for construction workers also go up. This means it will cost more to build a house. If developers want to stay profitable, they will have to sell units at a higher price.
Many developers tend to retreat at this time to wait for the costs to go down. With fewer houses coming up, those already in the market have less competition and enjoy the increased demand. It can be hard to build or buy a house during inflation periods, but much more profitable to rent or sell.
Final Thoughts
Inflation may negatively affect the economy, but for real estate investors, it’s a blessing in disguise. If you have a property that’s generating cash flow, you’ll build wealth rather than lose it during inflationary periods.
June 30, 2022