How to Hedge Against Inflation with Real Estate Investments

Summary:

• • Real estate tends to appreciate at the same rate or faster than inflation over time. Property values and rental income often rise as prices increase, making it the best hedge against inflation.
  • Unlike stocks or bonds, real estate provides tangible assets that retain inherent value, which can decline sharply. The land and buildings themselves hold value.
  • Mortgages allow investors to leverage real estate assets. Inflation can essentially pay down debt over time as property values rise. This helps maximize returns.

Investors seek safe places to invest as the economy rapidly changes due to rising inflations. The government spent about $13 trillion to deal with the pandemic, which is an opportunity to invest in different sectors. Investors agree that investing in real estate can hedge against inflation and withstand different market conditions.

However, what are the things that we can learn from real investment during the recession? What factors do you need to know about hedging inflation using real estate? You may have a lot of questions.

Let’s talk about the role of real estate investments and how they performed during historically high inflations so you’ll understand whether now is a good time for real estate investing or not

What Is an Inflation Hedge?

An inflation hedge is an investment designed to protect against the decreased purchasing power of money as time goes on. Due to inflation, money loses value, and our dollars won’t go as far. This can be offset by investing in assets that hold their value or appreciate during inflationary periods. 

Real Estate investors hope to preserve their purchasing power rather than lose it to rising prices. The best investments to beat inflation are stocks, real estate, gold, and other commodities. The goal is simple—beat inflation by investing in places where money retains power.

If you’re curious about how to calculate inflation rates, you can refer to the BLS inflation calculator.

Real Estate Assets That Are Good Inflation Hedge

Relevance Between Inflation and Real Estate

When the inflation rate spikes, investors get wary of long-term returns declining, but real estate appreciates as fast or faster than inflation over the long run. Property values and rental incomes often climb as inflation rises. And values frequently surpass general inflation with a limited housing supply. 

However, no investment is immune to swings. But compared to stocks and bonds, real estate has swayed less over the decades, and real estate also protects you from economic depressions. That’s why investors view housing as an inflation-resilient asset class worth weighing more vitally in portfolios when inflation erupts.  

Real Estate During High-Inflation

Inflation’s impact on real estate is a mixed bag. On one hand, rising prices can boost property values as demand outpaces limited supply. And with rents tending to rise too, rental income potential grows. Since real estate is a long-term asset not vulnerable to short-term market declines, so it holds inherent value over time. This explains how an investment can be a hedge against inflation.

However, the same forces triggering periods of inflation also affect housing markets. Mortgages, renovations, labor—all grow more expensive. Returns can erode if owners aren’t wise enough. The key is factoring economic conditions and projections into decisions, not just chasing assumptions. 

Nothing perfectly withstands such complex macroeconomic dynamics, although real estate often holds during high inflation. Investors need realistic perspectives.

The Role of Real Estate In Hedging Inflation

Real estate can be a smart way to hedge against inflation. As prices rise across the economy, rental rates and property values tend to go up, too. That means the income and growth from your properties should outpace inflation. Simply put, your money goes further even as prices increase.

Real estate also provides tangible assets that retain fundamental value, unlike stocks or bonds that can swing wildly. And you can leverage your investment with a mortgage, where inflation essentially pays down your debt over time. 

Remember, the median US home price in 1991 was around $120,000 but it soared to over $400,000 in 2021; that’s more than three times higher thanks to inflation. So, if you want to stay ahead of rising prices, real estate delivers a time-tested hedge against inflation.

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Why Is Real Estate Considered a Strong Hedge Against Inflation?

Real estate is a solid inflation hedge for a lot of reasons. With limited housing supply plus ongoing demand, property values often climb with inflation. As living costs rise, rental income potential also grows – a rising tide lifting cash flow.

In addition, the inherent value of tangible land and buildings holds strong amid shifting prices. Furthermore, real estate moves with the economy’s growth. It provides steady rental income even when other assets falter. You can raise rents to match inflation.

Moreover, the limited availability of land drives prices up. Not only that, mortgages allow controlling assets with little money down. Also, different property types react uniquely to inflation; it sticks around for the long term, unlike stocks (some stocks are no longer trading), and real estate retains value even when currencies crash.

If you’re new to the idea of land investing, check out this case study of a land investor who reached financial independence in just 18 months.

What to Look for When Getting Into Real Estate Investments

Aside from the property’s location and your budget, there are some more factors to consider.

Investment Purpose

Clearly defining the purpose of a real estate investment upfront is critical to avoid unintended consequences later, especially if using debt financing. The main options are: buy to self-use to save on rent; buy to lease for income and appreciation but be prepared for landlord duties; buy to sell in the short-term for quick profits on property flips, or buy for long-term holds banking on substantial appreciation over time to meet goals like retirement.

Location of the property

No one can argue that “location” is one of the most important factors when investing in real estate. Properties closer to hubs like markets, bus stations, amenities, and such are more desirable, which means they can fetch higher prices. 

Aside from the nearby hubs, it’s best to consider the future developments of the area. It may have a relaxed and peaceful environment now, but it might get very noisy and annoying when big manufacturing facilities start developing.

One way to figure this out is to contact the public agencies in charge of the area’s urban planning; this will give you a good view of future development.  

Property Value

Many important factors depend on property valuation, such as listing price, investment analysis, insurance, taxes, etc. This means pinpointing the property’s value can save you a lot of headaches in the future. But how are you going to do it?

There are few appraisal techniques available. One technique that provides accurate valuation is the “Sales Comparison.” This involves looking at recent sales similar to the property, though you’ll need to adjust for factors like square footage, age, and renovations. If you want a faster option, appraisers can help you estimate what a buyer should pay.

Your Credit Score

Improving your credit score can pay off when it comes time to get a mortgage. The higher your score, the better the terms you’ll likely get from lenders. This also means you can save a lot of cash over the years.

So, if your score isn’t above 800 (considered excellent), it may be worth improving. Pay all bills on time, lower credit card balances to below 30% of the limit, avoid closing old accounts and applying for new credit cards, and check your credit report for errors will all help increase your credit score.

Your Expected Real Estate Income

You want to keep an eye on that cash flow for your investment property– that’s how much money you have left after covering expenses.

Some of the ways are:

1. Project your rental income by factoring in inflation, which tends to push rents up over time.
2. Estimate how much the property value itself will appreciate long-term.
3. Factor in tax savings from depreciation and other benefits.
4. Consider if renovations could boost your sale price down the road.
5. Compare taking out a mortgage vs just waiting for appreciation.

Be Careful with Loans

Loans make things easy now but can cost you later. Long-term interest racks up. Make sure you avoid getting over-leveraged. Even real estate pros struggle when markets drop. Shop around for the best rates and terms that fit your situation. Adjustable rates can help when interest rates fall, but will hurt when rates rise. Stay aware of hidden fees, too.

An Old or A New Building 

New builds let you customize but may face delays and hidden neighborhood risks. Existing properties offer quick access and potentially lower costs. Check the builder’s reputation with new investments. Review deeds and surveys when buying existing. Monthly fees like taxes and dues can be a hit to your cash flow, so compare carefully. You may also want to review the types of real estate investments.

Real Estate Market

Like investing, buying low, and selling high in fluctuating real estate markets is essential to any exit plan. Watch for mortgage rate deals to lower financing costs. Follow key indicators like prices, sales, new construction, inventory, flipping, and foreclosures. Know the trends in your specific market niche, too. Timing matters to maximize real returns.

Want to compare investment property loans?

What do lenders charge for a rental property mortgage? What credit scores and down payments do they require?

How about fix-and-flip loans?

We compare the best purchase-rehab lenders and long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

What Are the Effective Strategies for Using Real Estate as an Inflation Hedge?

Investors are protecting their wealth against inflation and increasing their chances of success by investing in different real estate categories. These investors understand that diversifying their real estate portfolio can mitigate the risk and maximize returns in the future. 

However, what are the most common tactics that these investors are utilizing? 

Use Debt to Invest In Real Estate

Another way is to invest in real estate debt. Shorter-term rental property loans let you lock in returns even when inflation heats up. You can predict your cash flows with less uncertainty since you know exactly when the loan will be repaid. Compared to owning property, lending has way less risk and headaches. You don’t have to deal with tenants or leaky roofs.  

Look for Real Estate with Higher Cashflow

As we know, rental properties tend to hold their value over time, and rent checks keep rolling in as passive income. As the cost of everything rises with inflation, rents also increase. That means your monthly income from your properties rises right along with inflation. 

Diversifying into rentals can balance out inflation’s hit to your other investments. Different assets react differently to inflation. Real estate tends to hold up, while stocks often take a beating when interest rates rise. Balancing your portfolio with a mix of real estate and stocks can help smooth out the bumps.

Use Your Network

When inflation is the news of the day, who you know matters. Getting in touch with experienced real estate pros can give you an edge. They’ve seen it all before and can guide you to smart moves and new opportunities.

Veterans have the inside scoop on which management tactics work in your area. They can help you maximize returns and avoid nasty surprises. An expanded network gives you access to deals not listed publicly.

During uncertain times, having people in your corner who know the lay of the land can make or break your investment returns. Connections are key to staying on top.

Use Crowdfunding Platforms

Crowdfunding platforms and co-investing programs like Arrived and Ark7 let investors club together to fund real estate projects. Instead of owning one property, you can own a small part of many different assets. This spreads around your risk instead of having all your eggs in one basket.

You can access deals generally reserved for huge real estate investors with crowdfunding. I’ve invested in Fundrise and Streitwise to diversify my real estate portfolio; do your due diligence before investing.

You can also check out real estate crowdfunding investments EquityMultiple and Yieldstreet, to further diversify and reduce your inflation risk.

Are There Drawbacks to Using Real Estate as an Inflation Hedge?

Yes, there are some drawbacks to using real estate to hedge against inflation, like rising ownership costs, potential eviction moratoriums, market volatility, tenants that are difficult to deal with (for landlords), and more. But even so, real estate remains one of the most reliable assets a person can have in his lifetime, as it can protect your wealth and purchasing power in the long run.

Its tangibility, income potential, leverage opportunities, and many more benefits from real estate can protect against inflation. The continuous demand for real estate powers its resilience to inflation, so do some research and plan your first real estate investment ASAP.♦

How do you hedge against inflation? What investments do you like to protect your assets from inflation?

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About the Author

G. Brian Davis is a real estate investor and cofounder of SparkRental who spends 10 months of the year in South America. His mission: to help 5,000 people reach financial independence with passive income from real estate. If you want to be one of them, join Brian and Deni for a free class on How to Earn 15-25% on Fractional Real Estate Investments.