Real Estate as an Inflation HedgeBeyond that, it’s important to stress that inflation is not necessarily a bad thing for the real estate market. In fact, in many cases, inflation can drive up property values and rents, which can be beneficial for investors. However, this is dependent on the overall economic environment and the specific market and property in question.
One factor that can make real estate a good hedge against inflation is that rents can rise with prices. Real estate managers can mitigate the effect of inflation by raising rents at managed properties. This can be done through techniques such as CPI indexation, periodic rent reviews, and shifting operating and capital improvement costs to tenants. However, it’s important to note that this does not occur uniformly across properties, property types, or markets, and it takes foresight and effective management to combat inflation effectively.
Real Estate’s Intrinsic ValueAnother reason why real estate can be a good inflation hedge is that it holds intrinsic value. Real estate is a scarce resource, particularly in dense, urban neighborhoods, and there may be a limited supply of properties and available land to build new structures on. This means that demand for real estate does not generally decrease, even when inflation rises, and property values might increase given the rising cost of materials and labor to build a comparable structure.
Historical Performance of Real Estate
Historical data also shows that real estate has been effective as a hedge against inflation. On a global scale, real estate in the past 40 years has had exactly 0% real rental rate growth, signaling a perfect hedge against inflation. In the US, Core Inflation Rate averaged 3.62 percent from 1957 until 2023. Rent Inflation in the United States averaged 4.17 Percent from 1954 until 2023. As a more recent comparison, the March 2023 year-on-year core consumer price advanced by 5.6 percent, whereas rent Inflation continued to climb to 8.2% in March 2023, up from 8.1% in the prior month. It was the highest reading since June 1982.
Housing’s Outsized Impact on Inflation
One of the main reasons real estate has performed so well as a hedge against inflation is because housing makes up 34% of the Consumer Price Index (CPI) to begin with. (When adjusting for the “Core CPI” by taking out food and energy, the housing share rises to 43%). In other words, housing costs make up the largest share of CPI and therefore have the most outsized impact on inflation. Investing in real estate, then, means investing in exactly what causes inflation, or better yet, investing IN inflation. To ask the question “Is investing in real estate a good hedge against inflation” is like asking “Is investing in inflation a good hedge against inflation?”
Factors to Consider
That said, some asset classes and investment strategies may still fare better than others in times of high inflation. Longer-term projects that rely heavily on locked-in, unadjustable leases, and cash flow to deliver returns may be at a disadvantage, and investors in real estate equity that are leveraged with adjustable-rate mortgages may also suffer from higher financing costs during times of inflation. Multifamily is generally the most flexible in terms of increasing rent rates due to the shorter lease terms when compared to other commercial real estate asset classes that may have lease terms of 5, 10, 20 years, or even more.
Particularly in today’s inflationary environment, it may be prudent to consider rebalancing your portfolio to include private real estate as an alternative investment and real asset that may fare better amid inflationary challenges compared to traditional stock and bond investments.
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 to 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.