Refuge InvestmentsDecember 21
Even the smartest investments can suffer from the devastating effects of inflation. As prices increase and the dollar’s purchasing value decreases, some investments can become less valuable. But savvy investors historically chase cash flowing real estate to defend their equity.
Historically, real estate investing serves as a great alternative to investments such as stocks and bonds, offering increased asset security. Apartment investments help to serve as a suitable hedge against inflation in the economy.
Once you understand how real estate can help protect against inflation, becoming a real estate investor starts to seem a lot more sensible. Below we’ll look at how real estate investments can help protect against the ravages of inflation.
One of the reasons that buying real estate can be so useful as a hedge against inflation is that historically the value of real estate goes up over time. Whether you make changes to a property to increase its value or buy and hold, real estate values historically rise, especially in the long-term.
While inflation will impact the dollar’s purchasing value, the value of real property will typically rise despite inflation and often at a faster rate.
The increase in property value relies on many factors. However, real estate investments are historically a beneficial choice compared to other types of investments.
While we pointed out that property values tend to go up over time, rental prices also historically go up each year. While each rental market is different, residential leases are renewed each year, and annual rents can adapt to offset inflation. These owners won’t feel the impact of inflation as significantly as those investing in fixed income securities such as bonds or assets with long term leases.Yet one more solution to ensure your investments remain profitable.
For property owners who don’t purchase a property outright but instead opt to get a mortgage, inflation also plays to the investor’s favor. With a fixed mortgage, investors will often end up paying a flat rate on their monthly payments as time goes by.
Though the actual dollar amount of the mortgage payment will remain the same, this payment’s interest expense will go down over time. Fixed mortgage payments of $5,000 with $3,500 of interest per month, for example, may end up paying the equivalent of $2,765 in interest ten years down the road putting an additional $735 per month against the Principal compared to day one.
But the real success for investors is that ten years from now, you, the investor, are paying down today’s mortgage with future inflated dollars. For example, if you have $120,000 Gross Rental Income your first year and your annual Mortgage Payment is $60,000, that equates to a payment of 50% of Gross Rents.
Now factor Rent Growth of 3% per year. By Year-10 your Gross Rent would have increased to $156,573 per year with the same mortgage payment of $60,000 or only 38% of Gross Rent.
In simple terms, the debt you owe on a property will reduce in significance over time. Proving to be very beneficial for investors and property owners, as the mortgage payment will have a smaller impact on your finances as time goes on providing further inflation protection.
Many of us remember the 2008 great recession’s impact, and further specifics will be presented in future articles. Despite market cycles, historical records support our discussion above. Even during those tough economic times, cash-flowing properties rewarded their owners with dependable revenue even when property valuations dipped, protecting those owners, allowing them to ride out that season with less concern.
If you want to increase asset security, you must consider the benefits of investing in real estate. Investing in real estate remains a smart move for investors and can help protect against inflation in ways that other investments can’t.
Ready to start investing in real estate? Contact us today to learn more about partnering with us, and to find out more about what we can do for you.