SS171: Real Estate Investing as a Hedge Against Inflation

SS171: Real Estate Investing as a Hedge Against Inflation

Real estate investing has long been considered one of the best inflation hedges. In this episode, Charles discusses how best to hedge inflation with income-producing real estate.

Watch The Episode Here:

Listen To The Podcast Here:

Talking Points:

  • Inflation refers to the general increase in the prices of goods and services in an economy over time, resulting in a decrease in the purchasing power of a currency. When inflation occurs, each currency unit buys fewer goods and services than before.
  • Historically, real estate has been considered a good hedge against inflation, but why?
    • Appreciation of Property Value: Real estate values tend to appreciate over the long term. As the cost of goods and services rises with inflation, the value of real estate may also increase. Property values often keep pace with or outpace inflation, giving investors a potential hedge.
    • Rental Income Increases: In an inflationary environment, the cost of living and rental prices may rise. Real estate investors who own rental properties can benefit from increased rental income, which can be adjusted over time to match inflation rates. If investing in commercial rental properties, focus on your NOI by pushing income and managing expenses to help drive your property’s value.
      • A side note here is that when inflation goes up, your expenses will also increase. It is up to the property owner to maintain the quality and condition of the property while not overspending. Keeping your rental units at market rent ensures that your tenants will not be hit with large rent increases in the future.
      • One of the great benefits of multifamily properties is that we sign tenants on 12-month leases. Each year, we negotiate a new lease. This allows landlords to increase rents as their expenses increase and as the market allows. Unlike certain real estate asset classes, leases may be 5, 10, 15 years, or longer.
    • Leverage Advantages: Real estate investing often uses leverage, such as mortgage loans. In an inflationary scenario, the property’s value may increase, and the investor can repay the mortgage with less valuable currency, effectively reducing the real cost of borrowing. When you have fixed debt, inflation erodes the value of that debt. It is a very powerful tool; however, leverage can also be dangerous if not used wisely.
    • Tangible Asset: During inflationary periods, investors flock to real estate. Real estate is a tangible asset whose intrinsic value is often less susceptible to inflation than financial assets. Tangible assets like real estate can provide security during economic uncertainty or inflation.
  • However, it’s important to note that while real estate can be a hedge against inflation, it also comes with risks and challenges. Economic conditions, local market dynamics, and other factors can influence the performance of real estate investments. Additionally, real estate is not a liquid asset, and selling properties may take time.
  • Not every piece of real estate will increase in value alongside inflation. Some examples of properties that will most likely not hold their value with inflation would be
    • Properties in dying or stagnant markets
    • Certain asset classes with ever-increasing vacancies (for example, in 2000, U.S. office vacancies were 8%; that number has grown by about 1/2% each year since. That is not a good trend for investors.
    • Old, outdated, and low-quality properties
    • Properties in less-than-ideal areas – in other words, buy good properties in good areas and neighborhoods in growing markets
  • Including real estate in an investment portfolio can contribute to diversification. Diversified portfolios are generally better positioned to withstand the impact of inflation on specific asset classes.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo, and today we’re going to be discussing real estate investing as a hedge against inflation.

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Charles:
Inflation refers to the general increase in the prices of goods and services in an economy over time, resulting in a decrease in the purchasing power of a currency.

Charles:
When inflation occurs, each currency unit buys fewer goods and services than before. Now, historically, real estate has been considered a good hedge against inflation. But why? Well, number one is the appreciation of property value. Real estate values tend to appreciate over the long term as the cost of goods and services rises with inflation, the value of real estate may also increase property values often keep pace with or outpace inflation given investors a potential hedge. Number two is rental income increases, and in an inflationary environment, the cost of living and rental prices may rise. Real estate investors who own rental properties can benefit from the increased rental income, which can be adjusted over time to match inflation rates. If investing in commercial rental properties, focus on your NOI by pushing income and managing expenses to help drive your property’s value. Now, a side note here is that when inflation goes up, your expenses will also increase.

Charles:
It is up to the property owner to maintain the quality and condition of the property while not overspending. Keeping your rental units at market rent ensures that your tenants will not be hit with a large rent increase in the future. Now, one of the great benefits of multi-family properties is that we sign tenants on 12 month leases. Each year we negotiate a new lease with a tenant, and this allows landlords to increase rents as their expenses increase and as the market allows. Unlike certain real estate asset classes where leases maybe 5, 10, 15 years or longer. Number three is leverage advantages. So real estate investing often uses leverage such as mortgage loans. In an inflationary scenario, the property value may increase and the investor can repay the mortgage with less valuable currency, effectively reducing the real cost of borrowing. Now, when you have fixed debt, inflation erodes the value of that debt and is a very powerful tool.

Charles:
However, leverage can be dangerous if it’s not used wisely. Number four is the tangible asset. So during inflationary periods, investors flock to real estate and real estate is a tangible asset whose intrinsic value is often less susceptible to inflation than financial assets. Tangible assets like real estate can provide a security during economic uncertainty or inflation. Now, however, with all these benefits, it’s important to note that while real estate can be hedging against inflation, it also comes with some risks and challenges. So economic conditions, local market dynamics and other factors can influence the performance of real estate investments. So not every piece of real estate will increase in value alongside inflation. Some examples of properties that will most likely not hold their value with inflation would be properties in dying or stagnant markets, certain asset classes with ever increasing vacancies. For example in 2000 US office vacancies were at 8% and that number has grown by about a half percent each year since.

Charles:
And this is not a good trend for investors in that asset class, old, outdated, and low quality properties and properties in less than ideal areas. In other words, buy good properties in good areas and neighborhoods that are in growing markets. So including real estate and investment portfolio can contribute to diversification. And diversified portfolios generally are better positioned to withstand the impact of inflation on specific asset classes. So please remember to rate, review, subscribe, submit comments, and potential show topics@globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs@syndicationsuperstars.com. That is syndication superstars.com. Look forward to two more episodes next week. See you then.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

Links Mentioned In The Episode:

Are You a Fan? Subscribe, Rate, Review & Share – Click Here To Learn How

What question do you always wish I would ask but I never do?

Connect with the Global Investors Show, Charles Carillo and Harborside Partners:

Scroll to top