Updated: Jul 23
This past week the July 2022 inflation number was released at a staggering 9.1%. Not only is this the highest we have seen inflation since 1981, it is also notably higher than it was expected to be particularly in light of the Fed's 75 bps rate hike the previous month. However, many American's are unaware of what exactly this means for them or their finances. Today we will discuss how inflation is impacting the average American and how real estate can be used as a hedge against inflation.
How inflation impacts your income
Let's pretend we have a household whose income was 100k in 2021. Considering the current inflation rate of 9% means that this same household would need to make 109k in 2022 in order to afford the same lifestyle as they had in 2021. This of course is due to increases in costs such as rent, gas, food, etc.
How inflation impacts your cash
If you have money sitting in a checking or savings account making almost no return, inflation will have a drastic impact. Once again let's say we have 100k sitting in a savings account in 2021. Today in 2022, we could only purchase 91k worth of goods due to the reduced buying power on this sum. Essentially, this is the same but inverse problem as the one given above for income and demonstrates why we want to be cautious with having too much cash tied up where it isn't making any returns.
How inflation impacts your investments
Continuing with our example from above let's say you invested 100k in 2021. How would that investment be doing one year later today in light of inflation? The answer of course depends on the type of investment that you made. An investment in the stock market would not only be effected by 9% inflation but also the losses seen in the market. An investment in something safer such as bonds might be producing 3%, but this still leaves a 6% deficient when the 9% inflation is considered. This might leave one wondering where they can find an investment that is advantaged during times of high inflation.
What you can do to hedge against inflation
When you invest in real estate you are placing your money into a hard asset. By this we mean a physical property that generates income independent of the market. Because rents ride upward with inflation and the value of commercial real estate is based on the income generated, the value of the property will increase along side the inflation within the market. This is an enormous advantage for investors. Additionally, the overall returns of real estate tend to be much higher than inflation which means you can actually continue to make a return on your investment even during challenging times economically. Finally, the tax advantages of real estate keep much more of those returns in your pocket when compared to other investment options. In summary, we believe that multifamily investing will continue to produce strong returns and value for it's investors regardless of where we see inflation go in the near future.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please set up a meeting with us through our Calendly link and subscribe to our weekly blog here.