Multifamily Real Estate Investing is a popular form of passive investing among real estate investors. In recent years, it has gained recognition as a potential inflation hedge, offering investors a way to protect their wealth from the impacts of inflation given that inflation acts as a tailwind for real estate prices and rents.
Inflation and its Effects
Inflation is a rise in prices over time, which results in the reduction of the purchasing power of a currency. It is a common issue for many countries, especially those with rapidly growing economies (and those that print too much currency). As the cost of goods and services increases, the value of money decreases. This results in a reduction in the standard of living and decreased purchasing power for consumers.
Investing in real estate, particularly multifamily properties, can offer a way to protect against inflation. Unlike stocks and bonds, real estate has a built-in hedge against inflation because it is a tangible asset that is valued based on its ability to generate income. As the cost of goods and services increases, so does the potential rent that can be earned from a property. This allows real estate to maintain its value and purchasing power over time, making it a more stable investment option in the face of inflation.
In an Inflationary environment, multifamily cash flows and valuations increase. Here’s why:
Demand over Supply
Construction costs tend to increase during inflationary times, making the building of new housing units more expensive. Thus, chances are that potential developers might postpone building. These days, this decreases the level of new supply and makes new homes more expensive, and the rising interest rates make mortgages more expensive. For the average homebuyer, homeownership is now out of reach, forcing them into the renters market.
Increase in prices for rents
An increase in demand for multifamily leads to significant rent growth in markets. During inflationary environments, rents tend to rise to keep up with the cost of living. In markets that have experienced massive growth, high demand also helps push rents even higher.
Multifamily leases are short to ride or hedge against inflation
Multifamily leases are short and as they expire, owners can attempt to increase rents for existing or new tenants to keep up with inflation. Rising rents help to offset rising operating expenses, which lead to stable or increased cash flows and valuations.
Multifamily properties, offer several benefits as an inflation hedge.
- They offer economies of scale that can help to offset the impact of inflation on operating costs. For example, the cost of utilities and maintenance can be spread out over multiple units, reducing the impact of inflation on each unit. Additionally, multifamily properties often have a high demand for rental units, allowing landlords to raise the rent in response to inflation and maintain the value of their investment.
- The potential for rental income growth. As the cost of goods and services increases, so does the potential rent that can be earned from a property. This allows real estate investors to maintain the value of their investment over time, as the increased rental income can help to offset the impact of inflation.
- Multifamily properties offer a steady stream of income, which can be particularly important in the face of inflation. Unlike stocks and bonds, which are subject to market fluctuations, rental income from multifamily properties is generally more stable and predictable. This stability can provide a level of security for investors, allowing them to better manage the impact of inflation on their investments.
- Multifamily real estate investing also provides several tax benefits. Real estate investments are often subject to depreciation, which can help to reduce tax liability and increase cash flow. Additionally, mortgage interest on multifamily properties is tax-deductible, which can offer further benefits to investors.
- Multifamily real estate investing also offers a way to diversify an investment portfolio. By spreading investments across multiple properties and markets, real estate investors can reduce the impact of market fluctuations and diversify their holdings. This diversification can help to reduce risk and provide a more stable investment option in the face of inflation.
Multifamily real estate investing can be an effective way to protect against inflation. With its potential for rental income growth, stability, tax benefits, and diversification, multifamily properties offer a unique opportunity for real estate investors to protect their wealth and maintain their purchasing power over time. If you’re looking for a way to safeguard your investments in the face of inflation, multifamily real estate investing might be the ultimate hedge.
How You Can Get in On the Action
Cash Flow Champs is a privately held investment company that focuses on acquiring and managing opportunistic and value-add multifamily real estate properties. The company specializes in repositioning well-located assets in emerging markets surrounded by positive demand drivers such as population growth and job growth.
Cash Flow Champs partners with entrepreneurs and busy working professionals interested in investing in real estate but who lack the time to navigate the process. Alongside our partners, we aim to bridge purpose and profits in a manner that allows us to improve the lives of the residents in our communities and the neighborhoods where we operate.
In the words of Robert Kiyosaki, the poor and the middle-class work for money. The rich have money work for them. If you are an individual that wants to build and maintain generational wealth through real estate, all while making a positive impact on the lives of residents and the communities where you invest, we’d love to explore opportunities for synergies.
Schedule a brief call with us so we can get to know you better, understand your life goals, and to determine where synergies may exist.
This information presented on this site is for informational purposes only and does not constitute an offer or solicitation to sell shares or securities in the company or any related or associated company and is not a recommendation to pursue a specific investment opportunity. Any such offer or solicitation will be made only by means of the company’s confidential Offering Memorandum and in accordance with the terms of all applicable securities laws and other laws.