"People are worried about the current economic system and they want options."-Benjamin Miller, CEO of RE Investment platform-
Some folks invest in cryptocurrencies, others in the stock market, and some choose real estate.
Throughout much of 2021, one of the top worries of economists and average Americans was inflation. Economic policymakers typically prefer inflation rates of about 2% per year. However, in December 2021, the inflation rate was 7.04%. When prices rise at such a rate, it can make buying gas, groceries, or other necessities harder and have a profound impact on your ability to find affordable housing. But, of course, if you already own real estate, it may act as a hedge against rising prices.
How does real estate help you hedge against inflation?
Generally speaking, property values increase at a rate roughly 2% to 3% higher than inflation. If the inflation rate was 2% in a given year, history suggests that your home will increase in value by up to 5% in that year. If the inflation rate were higher than 2%, you could reasonably expect your home to increase in value even faster.
It's is worth noting that there are multiple ways to make money from a principal residence, rental property, or commercial property. For example, you could rent a room in your home to generate extra cash flow from your primary dwelling. In addition, you can divide your rental between a business and an individual tenant in specific locations.
You benefit twice because you receive a monthly rent check while owning an appreciating asset in such a scenario. You can almost think of a rental or commercial property as a dividend stock that is less volatile during times of increased inflation. The monthly rent check is your dividend, while the appreciation in the underlying asset provides a return on your investment.
Buying land can also be a great way to safeguard your portfolio from the negative consequences of inflation. Typically, the ground makes a home or office building so valuable. Therefore, simply buying a vacant lot can be an effective way to earn a sufficient return on investment to meet your needs.
The Florida market is favorable to property owners
In recent years, Florida has seen positive net population growth of almost 15% since 2010. The most significant part of that growth has come from individuals moving from states such as California, New York, and Illinois resulting in a substantial increase in demand for what most consider an almost nonexistent supply of homes.
Properties in Jacksonville, Orlando, and Fort Myers are the most likely to experience sustained price growth into 2022 and beyond as they tend to be smaller communities attractive to heavily populated states. Furthermore, these communities tend to feature undervalued properties compared to what you might find in the rest of the state.
Traditionally this means that you can expect the value of your home, rental property, or commercial property to increase in value in an inflationary environment. Therefore, if you consider buying real estate, it may be in your best interest to do so now while interest rates are relatively low.
Be aware of the relationship between inflation and interest rates
There is often a correlation between inflation rates and interest rates. For example, when the economy starts to heat up, interest rates rise because lenders want to maximize their return on investment. However, higher interest rates typically mean a reduction in purchasing power, which means lenders need to charge more to account for this.
Of course, higher interest rates also put downward pressure on the economy because it becomes harder for businesses and individuals to borrow money affordably. At some point, this will likely mean that it becomes harder to liquidate your real estate holdings as there will be fewer buyers to compete for them.
However, those who can't afford to buy a property will still need somewhere to live. Therefore, it may be possible to charge higher rental rates as there is now more demand for the limited inventory available for rent.
Suppose you own shares of real estate companies. In that case, upward pressure on interest rates may result in lower returns on those holdings as businesses because businesses tend to report lower earnings during inflationary pressures. Therefore, this may be a scenario where owning real estate is not a hedge against inflation.
Consider refinancing loans that have variable rates.
Mortgages with variable interest rates could become significantly more expensive as rates rise. As of Feb. 4, the national average interest rate on a 30-year loan is 3.77%. Although this is higher than what borrowers could have gotten a year ago, the current rate is still low by historical standards. Therefore, there is plenty of room for rates to go higher, and you should strongly consider refinancing to a loan with a fixed rate as soon as possible.
As a general rule, buying real estate can be an effective way to hedge against inflation. Historically, fundamental properties have appreciated faster than inflation even after taking into account fluctuations in that rate at any given time. Furthermore, real estate allows you to make money by charging rent or other fees to those who want to lease your building or land. However, it's important to remember the role of interest rates and other market factors before deciding if a given investment is worth making.
"The future is always coming up with surprises for us, and the best way to insulate yourself from these surprises is to diversify." -Robert J. Shiller, Economist
This article is for informational purposes only. It should not be considered Financial, Real Estate, or Legal Advice. The market fluctuates; therefore, not all information will remain the same. Consult a financial or real estate attorney before making significant investment decisions.