How Real Estate Acts as a Hedge Against Inflation

inflation refers to the increase in the average price of a basket of goods or the cost of living when those prices increase purchasing power decreases so for example if inflation is eight percent per year when a basket of goods that cost a hundred dollars is repriced a year later after eight percent inflation that same basket of the goods would cost 108 inflation affects the market in a variety of ways in the us the federal reserve's primary task is to keep inflation at a steady and manageable rate in order to avoid big runs in the economy followed by severe recessions the way that the fed tackles inflation is by raising interest rates the purpose of that is to increase the cost of borrowing which makes expansion of the economy more expensive and tends to slow down the development of housing the production of goods and a variety of other things in the economy consequently mortgage rates also rise during periods of inflation whenever either lenders anticipate that the fed or the market average interest rate will go up or when they are following increases in the federal reserve rate for example in real estate development the cost of construction materials the cost of machinery and by extension the cost of labor all increase so developing a piece of real estate in an eight percent inflationary environment typically becomes about eight percent more expensive to build so consequently a real estate development project during a period of inflation would be more expensive to build after inflation than it would have been before i just got a call from a client who is worried about inflation particularly with recent news coming out that inflation is on the rise and he asked me is there a way that i can take advantage of this in order to capitalize on the rising inflation and what is certain to be the impending rise of interest rates and i told him absolutely yes in real estate investments rents typically rise during inflationary periods and that's just because the cost of ownership of the building becomes more expensive and landlords typically pass that higher expense onto their tenants consequently the increase in income in investment real estate also causes the value of the real estate to go up and this is why real estate is a great hedge against inflation because rents and income will typically rise with inflation and therefore the real estate investor will not lose as much purchasing power from their cash flow as they would have if they weren't invested in real estate and strengthening that increase in value is the cost of debt during an inflationary period when interest rates go up new debt becomes more expensive so existing debt becomes relatively cheaper for instance if you have a four percent mortgage on a piece of real estate and then after inflation interest rates rise to six percent then the real estate owner who has a four percent mortgage is effectively getting below market financing and therefore earning greater returns than they would if they had six percent financing on the property savvy real estate investors that understand this will use this to their advantage by taking a look forward at when their existing loans are coming due and will often choose to refinance early in order to lock in the current interest rate and hedge against future inflation if you have a loan coming due in the next couple years it's highly likely that your interest rate then will be much higher than it would be today if you locked in a fixed rate loan right now prospective real estate investors or those who are not yet invested but thinking about getting into investing they need to be careful real estate can be a great hedge but there are certain risks associated with investing in real estate in an inflationary period especially if your holding period is projected to be very short the fed's reaction of raising interest rates in order to curb inflation is an attempt to slow down the economy and that puts the real estate market at risk of a correction or bubble it's probably a good idea to have a longer projected hold time and to lock in as long of a fixed-rate loan period as possible but understanding inflation is just one small part vast array of knowledge that is necessary to be successful in real estate investing so if you haven't already hit that subscribe button and like this video share it with anybody you think would find it interesting and definitely check out my online real estate courses for training and coaching and real estate investing at trevorcalton.com thanks for watching

Channel: Real Estate Finance Academy | Trevor Calton

Views: 1,604

Keywords: Inflation explained, Inflation real estate, how does inflation affect real estate, inflation, inflation and real estate, inflation commercial real estate, inflation economics, inflation explained, inflation impact on real estate, inflation in real estate, inflation real estate definition, real estate inflation, real estate inflation hedge, real estate investing, real estate investing for beginners, real estate investing inflation, what is inflation

Id: WJSdFqUYLU0

Length: 4min 45sec (285 seconds)

Published: Thu Apr 14 2022