Real Estate as a Hedge Against Inflation
Amidst outrageous bidding wars, inflated purchase prices, appraisal gap coverage and first-born children being offered up in negotiations to win a deal, now is a great time to buy an investment property. Even with the influx of demand and relatively low supply, owning real estate can help hedge inflation.
With the $4 Trillion of debt the US took on to pay for the CARES Act, most experts are expecting a spike in inflation to help devalue that debt. According to the International Monetary Fund, ‘an increase in the money supply also causes inflation’.
Inflation reduces the purchasing power of each unit of currency, which leads to increases in the prices of goods and services over time. It's an economics term that means you have to spend more to fill your gas tank, buy a gallon of milk, or get a haircut. In other words, it increases your cost of living and devalues the value of a dollar.
President Ronald Reagan said, "Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man."1
Let’s devise a strategy to get ahead of inflation.
As inflation refers to a decrease in your buying power an inflation hedge via real estate investing can protect you from it. An inflation hedge typically involves investing in an asset expected to maintain or increase its value over a specified period of time (i.e. buying in a 20-year market). Since home values and rents typically increase during times of inflation, real estate is considered a hedge against inflation. Thus, if you need a weapon at your disposal to fight inflation, you should invest in real estate.
The time is now. While the inflation rate took a dip in 2015, it rose from 0.7 to 1.1 percent in 2020 alone, (usinflationcalculator.com). CNBC cautioned on the likelihood of a rising inflation rate as far back as last year, when they quoted Fed Chair Janet Yellen as stating that an interest rate hike was a “live possibility” and that “the economy would grow at a pace sufficient enough to generate a return inflation to a 2 percent inflation rate (which is the Fed’s target).” What this all means for you, is that you need to take protection against inflation seriously and invest in real estate ASAP. We’ll show you how.
Additionally, stimulus spending adds to the money supply, but it creates a deficit adding to a country's sovereign debt. That could also increase interest rates, which often lends to purchase prices falling. I’ve had many clients say they want to wait for prices to come down, which is most likely only to happen when rates increase. That’s great in theory; however, one must consider the time value of money. If you wait a year for prices to fall say $50,000, but rates increase around 1 point, your payment on a 30-year fixed note is essentially the same. So, you don’t save any money, and you lost that year of appreciation.
[1.Frederic B. Hill and Stephens Broening. "The Life of Kings: The Baltimore Sun and the Golden Age of the American Newspaper," Page 170. Rowman & Littlefield, 2016.]