Investing in Multifamily Real Estate is definitely one of the best ways to build enduring wealth because it doesn’t depend largely on price fluctuations from the stock market, and assets appreciate over time. It is also a good way to protect your money from volatility, which means that real estate, in its various forms, can serve as a hedge against inflation.
But what happens when the current market is going through a period of significant inflation? Is it still a good idea to invest money?
The short answer is yes, but you need to understand well what you’re getting into.
According to Investopedia, inflation is “the decline of purchasing power of a given currency over time. In layman terms, it means that the value of your hard-earned money decreases, while prices stay the same or, in most cases, rise.
Now if the rise of inflation is moderate, people will want to spend their money before it loses more value, which can be a good thing for business since more people will be spending money out there.
On the other hand, if inflation keeps rising over a long period of time, it could definitely have devastating and long-lasting effects on the economy of a nation. If you want to see a bad case, just look at Venezuela, a country that despite its rich natural resources and advantageous geographical location, is going through one of the worst economic crises in its history, and maybe in the history of Latin America
Keep reading to understand what causes inflation, how it can affect your multifamily investments, and why these very same investments can protect you against the effects of inflation.
What causes inflation?
There are many answers to that question, but for the most part, it happens when supplies can’t cover the demand, or when production costs cause the supply to decrease, thus increasing the prices of products and services. In both scenarios, prices are expected to rise eventually for a broad basket of goods and services.
In the case of the United States, inflation has been low since the global economic depression that occurred between 2007 and 2009. However, the effects of the COVID-19 pandemic are now weighing more on the economy, especially in the inflation rate.
According to the Federal Reserve, the entity in charge of the US monetary policy and inflation management, keeping inflation low and stable allows households and businesses “to make sound decisions regarding saving, borrowing, and investment, which contributes to a well-functioning economy.”
Inflation and multifamily real estate
The main advantage that real estate has over other types of investments such as bonds or stocks, is that investors are acquiring tangible assets with intrinsic value. As long as you maintain and improve your properties, your investments not only will be safe but will appreciate over time
Additionally, if you bought into a multifamily deal, there’s also the revenue you can get from rentals. The returns and capacity for appreciation make investing in multifamily real estate a solid choice for times where there’s a lot of financial turbulence.
When the economy enters a period of inflation, prices of goods and services rise, rents included, because it means there’s more demand, so your assets become much more valuable.
How does multifamily real estate help you withstand inflation
Remember when we said that inflation reduces the purchasing power of a currency? This also means that the value of the types of returns you get from things like bonds also decreases. To counter this, you need to seek assets that can grow in value, such as land.
Rents rise during a period of inflation, and for investors, this translates into an increase in their revenue. With more money flowing, it’s easier to outpace the increase in prices of other goods and services. Assuming an investor improves and maintains his or her properties, they can potentially make more money in the long run.
Additionally, debt secured by real estate is often in the form of long-term, fixed-rate loans, which keep debt payments stable in periods of rising inflation. Having fixed debt payments while rents and property values grow has the potential to be very advantageous for investors.
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