If you’re not hearing about it in the news, you’re feeling it every time you go to the store or check your account balance – inflation. In this time of extremes, potential real estate investors may be asking themselves if now is a good time to invest while owners may be wondering if they should sell. There’s a lot to unpack here, so let’s get to it. What is inflation and what does it mean for the real estate market?
Investopedia defines inflation as “A rise in prices which can be defined as the decline in purchasing power over time.” This is why it seems that your dollar isn’t going as far as it used to – because it doesn’t!
So, what about real estate? Now may not be the time to invest if you don’t feel as though you have the capital or confidence to do so. During the pandemic, interest rates hovered around 3% and savvy real estate investors went on shopping sprees. Now that the economy has begun to correct, those cheap money rates are long gone.
However, if you’re already in the market, you’ve probably noticed that not much has changed day-to-day with your investments. That’s because historically real estate has proven to be one of the most stable investments during inflation.
In fact, during inflationary times many investors seek the safe haven of real estate for three main reasons.
Reason Number 1: Real Estate is Tangible
Real estate is a tangible asset, making it a more stable investment in uncertain times. There are few (if any) investments that have so many options. Think about it: real estate is the only investment you can live in, rent out or sell.
Reason Number 2: Real Estate Leads to Increased Value
Inflation drives up the prices of everything – including real estate. During inflationary times, real estate investors will sometimes leverage their purchases to buy more real estate. Therefore, the investor is able to make money on both their investment dollars and on borrowed money.
Reason Number 3: Fixed Rates are Fixed
This is likely the most compelling reason to own real estate during times of high inflation. Real estate investors typically benefit from rising prices. Why? If you have a fixed mortgage rate as your biggest expense, your monthly mortgage payment stays static while rents rise to adjust for inflation and market demand. As the cost of everything rises, the landlord has the opportunity to raise rents and thereby increase their cap rate.
Just to recap, while real estate may be more expensive during times of high inflation, real estate investors and landlords have options not available to people who say, solely invest in the stock market. Real estate is not just a great investment during times of inflation, if managed correctly, it can provide income for investors during times of personal financial hardship.
Wondering if investing in real estate is right for you? Download the first chapter of Destination Perpetuity for free.