For the past couple of months, inflation has been a great concern for investors, ever since October, when the US CPI (Consumer Price Index) spiked to 6,2% year-over-year, the highest level in 30 years. Labor shortages, supply chain disruptions, rent increases, and a surge in energy prices have all contributed to the current high inflation rate, and there are no immediate solutions in sight.
Due to these inflationary trends across all sectors of the US economy, trying to find investments that can pose as a hedge against inflation has become a number one priority for investors. This article will list what types of real estate are the safest hedge against inflation.
How Can Hedging Help?
Although inflation can decrease the performance of many financial assets, there are options to protect yourself against it through hedging. Hedging against inflation means choosing investments that will preserve the value of the assets from inflation. This protection is important to ensure that your investments hold their value and do not provide a long-term loss. When choosing a hedge, the ideal thing is to look for stable investments in assets that can either maintain their value through inflation or have the potential to increase in value with time. Real estate is a good example of a sound investment to hedge against inflation, as it is precisely the type of asset which can increase its value over time and provide long-term ROI.
Types of Real Estate Ideal for Hedges Against Inflation
Every year the dollar loses a bit of its value, and landlords raise their rents to keep up with or surpass inflation. For this reason, rental properties are excellent protection from inflation. The process is simple: you buy the property with today’s dollars, borrow a fixed-interest rental property loan, and then raise your rents while your mortgage payment stays the same. Multi-Family properties that typically have shorter lease/rental terms can be a good hedge against inflation. Commercial properties that have long term leases may not be as good depending on the lease rental rate increases, but you will typically have some rental increases during the term. Expect to see CPI rent increases on commercial leases during high inflationary periods.
Just like with rental properties, land has inherent value. People need it for building houses on it, for farming, building commercial properties on, or for recreational reasons. And the more people populate the earth, the limited and more valuable land becomes, making it an ideal hedge against inflation.
A good option that provides strong returns and a hedge against inflation is to lend money secured by real estate. You can lend money as private notes to other real estate investors or through crowdfunding platforms. Some platforms allow you to invest as little as $10 toward the loan of your choice. This is an easy and passive way to protect yourself against inflation, especially if you don’t have the funds to purchase a property, but love to invest in short-term loans.
Real Estate Crowdfunding Investments
A regular brokerage account allows you to buy publicly traded real estate investment trusts (REITs). Still, by law, these funds must payout 90% of their profits in dividends, making them a reliable source of passive income. However, it is not a great source of growth or inflation protection. On the other hand, private REITs are less regulated and therefore more flexible. Some investors pay high dividends, while others reinvest most of their revenue into new properties.
However, with less regulation comes greater responsibility, so you need to research funds before investing.
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