According to Reed Pirain, real estate is one of the best investments you’ll ever make. And that’s true even if times of high inflation, stagflation, mini-recession, or whatever it is America is going through right now.
One fact is certain: Real estate inflation has risen 4.19% annually since 1967, while inflation increased by 4% annually. That means real estate is still what’s typically considered to be one of the best “inflation hedges” if investors hold on to it for the long term.
But it’s not as simple as just buying the right property or land — or even investing a bit of cash through crowdfunded real estate. When the economy is going through a period of high inflation with no end in sight, real estate investors should consider these tried-and-true approaches for success.
Understand the Benefits and Risks
Inflation is complicated. It’s measured by everything from a Wholesale Price Index and employment to the Consumer Price Index and how much money is being printed. Most financial advisors agree that real estate consistently holds and usually increases in value even during periods of inflation.
Usually, if the cost of goods rises, so does rent even if wages increase, decrease, or stay the same. In addition, homeowners who have a fixed loan will likely keep paying the same amount for the property even when the value increases.
But no investment is guaranteed to succeed, especially in times of high inflation. Investing in real estate is impacted by bad locations turned worse during inflation, high vacancies, and delinquent tenants.
Jobs are at risk during inflation as well, meaning that you may have to sell your home and move to a different area.
Consider Different Kinds of Real Estate Investments
Owning your own home is a significant investment and one that can protect you during a high-inflation economy. But those with experience investing in real estate know the power of diversifying their holdings.
Rental properties tend to do very well during inflationary periods. Short-term leases work well because as a landlord you can easily justify increasing rents to offset the higher cost of operating and owning the property.
Another solid option is investing in a residential real estate investment trust, or REIT.
If you can’t quite afford to purchase and maintain a rental property, it may be a better fit to buy shares in a REIT, where you can own everything from single-family homes and mobile home communities to multifamily apartments without having to spend additional money by managing them yourself.
You can even invest in a self-storage unit through a REIT.
The Bottom Line
While it may be scary to think about investing in real estate during a period of inflation, it may be one of the smartest long-term investments to make to counteract the myriad impacts inflation and recessions have on the U.S. economy.
Talk to a financial adviser, weigh your options, and think about not just the most lucrative real estate investment option but the one that aligns best with your time and financial goals.