Are we heading into an inflationary period? I believe multifamily real estate is a good inflation hedge.
Real Estate Inflation Hedge
Nobody has a crystal ball to accurately forecast what happens next. Are we headed towards inflation or deflation? We can already see inflation in our purchases. Costco has come out and said they see inflation in many of their products. Residential real estate has become a bidding war. New home builders have stopped providing prices for new homes as they can’t accurately forecast what it’s going to cost to build because raw materials prices are rising so quickly. In addition, many companies have voiced their concerns that it’s difficult to find new employee labor. All these indicators show signs of inflation which does not come as a surprise to many as the government has pumped trillions of dollars into the system. The question that remains is whether this is transitory inflation, meaning is it temporary and then it will level off.
What can we do to hedge against inflation?
Real estate is a good hedge against inflation. In multifamily real estate, if individuals are making more money in labor costs, then they have more money to spend on rent and rent costs tend to go up. Many real estate investors, lock in medium to long term fixed rate financing so although the rental income is increasing with inflation, the debt service costs may remain fixed, causing an increase in profit for the property. Another benefit of multifamily is the timing for lease renewals. Most leases are for 12 month periods which allows the property owner to increase the rent to market each and every year. In other commercial real estate investments, many of the leases are long term in nature with rental bumps already negotiated into the lease contract. If inflation occurs and market rents increase dramatically year over year, multifamily properties can adjust accordingly where some other real estate investments may not have that flexibility.
Why do I share this story with you?
There are many news stories running right now about inflation. In addition many of us can see it with our purchases. We’ve heard that inflation may rise dramatically due trillions in stimulus money being pushed into the market. The question is what can we do to help hedge our exposure to inflation? If inflation does come, we want to have investments that benefit from inflation. I believe multifamily real estate has the opportunity to benefit from inflation. With any investment, there is no guarantee but I believe taking action and trying to best position yourself and your family is a wise thing to do.
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