How investing in real estate is one of the best hedges against inflation

Real Estate | 6 May |

As a result of inflation’s persistence in the economy, the sticker shock for most essential resources we depend on such as electricity, food and gas make it more difficult for families across the country to afford, well, life.


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The annual inflation rate accelerated to 8.54% this month, the highest since 1982. Inflation isn’t anything new and it’s bound to happen again and again. If history teaches us anything, it’s that investing in income producing real estate offers a strong hedge against inflation.

Real Estate Investments Benefits

If history is an indication, during periods of high and persistent inflation, cash sitting in low-yield savings, brokerage or other similar types of investment accounts, will likely be worth less over time than if you moved those funds into income producing real estate. Here’s why:

Trevor H. Halpern, J.D. is the No. 1 independent agent at Phoenix-based North&Co. and the founder of the Halpern Residential real estate group.

Appreciation. Property values keep pace with or sometimes even exceed the rate of inflation, especially in major metros like Phoenix.

Increasing Rent. Inflation makes everything more expensive, even rent. If you buy a single or multi-unit rental property today, locking in a low interest rate (relative to the expected impending interest rate hikes) with a fixed mortgage translates to more money in the long-run because you can charge more for rent in the future, thus creating financial gain in the future because you locked in today’s payment for the duration of your loan, while charging more in rent in the future. The same principles apply for cash buyers – lock in today’s purchase price, create monthly cash flow that increases over time, and capitalize on asset appreciation over time.

Scarcity. Nationwide, the basic laws of supply and demand are at play. There are not enough homes available for those who want them and residential new builds are not ramping up at a pace sufficient to balance the supply situation. In today’s climate, when you buy residential property, you are purchasing a scarce commodity. As a key economic concept, owning a good that is scarce puts you in a favorable financial position. Owning a good that is both scarce and necessary (like housing) puts you in an even better financial position.

Investment Real Estate Trending in Phoenix

The drastic pendulum shift during the pandemic from working from the office to working from home made investing in residential properties the new trend.

Our friends at the Cromford Report who analyze the Phoenix real estate market note that supply is growing for single-family rentals, citing a 34% increase in the number of new rental listings over the past four weeks, compared with the same four weeks a year ago, especially in areas like Gilbert.

In our experience, we’ve found that about a quarter of our clients operate as investors, looking to purchase income-producing properties. They’ve quickly learned that rental assets are the new bread and butter to survive and thrive in the inflation-induced economic climate.

During COVID, many Americans grew their cash reserves and subsequently, as inflation began to take a chunk of that cash back, many people shifted from investing in stocks to real estate. At Halpern Residential, we’ve facilitated transactions on investment properties where our clients either rented them out or listed them as vacation rentals like Airbnb with the sole purpose of diversifying a portion of their portfolio as a hedge against inflation.

The Benefits of Investing in Residential vs Commercial Properties

Though commercial real estate was traditionally where one could expect significant returns, that’s not necessarily the case anymore.

Residential Rebellion. With fewer people returning to the traditional brick and mortar office, many companies are now negotiating their leases for smaller office spaces and decreased overhead, resulting in less demand for commercial office buildings. With more supply available for commercial properties, the scarcity effect is diminishing in that class of investment.

Favorable Adjustments. In this marketplace, residential properties are more scarce than commercial properties, thus, the fundamentals of investment point to favorable conditions on the residential side of things. Furthermore, residential income producing properties allow for more flexibility than commercial properties. For example, if you own a residential rental property, you get to test the market and adjust your rental rates frequently because most residential leases are for 6 to 12 months. Commercial leases tend to be longer (5-10 years) and lock the owner into rates that may not be favorable as the term of the lease matures. With residential properties, you can reassess market conditions more frequently and adjust your rental rate accordingly. Even better, if you own an Airbnb, you have more flexibility to adjust those rates up and down as much as you wish, even adjusting seasonally or based on major events that create demand in the area (think Super Bowl).

Income-producing real estate has traditionally been a wonderful asset class to protect and grow your money during periods of inflation and can prove a great vehicle to keep your money, make it work for you and watch your nest egg grow.

There’s no better time than the present to capitalize on investing in real estate, especially while mortgage rates are still “somewhat” reasonable. Read our blog post on how inflation is surging mortgage rates to unprecedented levels.

As you can see, there are a lot of variables at play. Which is even more reason you can lean on Halpern Residential, as we work with you, so rising inflation and mortgage rates don’t work against you.

 

Trevor H. Halpern, J.D. is the No. 1 independent agent at Phoenix-based North&Co. and the CEO of the Halpern Residential real estate group. As a Phoenix native, Halpern’s deep knowledge of both people and property has allowed him to create client success in all areas of town. As a graduate of ASU’s College of Law, Halpern prides himself on delivering high-level strategy, efficient negotiations and precise tactical execution. Since 2011, Halpern has sold over $130 million in real estate and has been in the top 1% of real estate agents in the Greater Phoenix area.

 

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