With inflation on the rise, real estate can provide investors with valuable protection. Rents on properties tend to rise alongside inflation. Real estate investors may benefit from inflation by passing rising costs to tenants while taking advantage of lower mortgage interest rate reductions. However, inflation can also have a negative impact on investors, if they don’t make wise choices.
Before you jump into a built-to-rent investment or any other type of real estate investment, there are some things you should understand. Here are a few things to know about how real estate and inflation might impact your investment.
Property Prices
Property prices often rise during periods of inflation because investors seek tangible assets that can protect them against inflation while still yielding a substantial return.
One effective strategy to increase your chances of investing successfully during times of rising inflation is locating properties that are undervalued – this may prove difficult, but doing your research and working with a real estate agent may provide assistance.
Another smart investment strategy is to diversify your investments by purchasing both commercial and residential real estate! This can help combat inflation by giving you access to multiple asset classes in different places.
Finally, it is worth noting that real estate investments tend to be less affected by inflation than other forms of investments, like stocks and bonds. This is because their returns rely more heavily on occupier demand, rental rates, and expectations for future price fluctuations than stocks and bonds do.
Rental Rates
Housing prices typically increase during periods of inflation due to people needing shelter regardless of currency value fluctuations, while landlords benefit by raising rent prices to reflect inflation – making renting an attractive alternative for those unable or unwilling to own property due to high mortgage rates.
Rent inflation appears to be slowing. Online real estate websites such as Zillow and Redfin have recorded drops in rental asking prices, which can only be seen as positive signs for the economy as shelter costs make up 33% of the consumer price index (CPI).
Notably, real estate does have its limits as an inflation hedge. A significant rise in interest rates would increase borrowing costs significantly and could reduce demand for real estate and consequently depress growth.
Appreciation Rates
Inflation is an integral part of the economy, yet its effect can often cause property investors to reconsider their decisions. If you’re investing in real estate, inflation can affect rental rates, capital values, and mortgage interest rates – yet shouldn’t discourage you from doing so!
Property prices typically increase with inflation due to demand, since there’s limited supply compared to fiat currency in the world, thus driving demand up when its value declines.
At first, inflation can reduce demand for homeownership as people need to borrow more, leading them to save instead of spend. Furthermore, expectations of future inflation can lead to even faster price rises than before.
Mortgage Rates
Inflation usually causes mortgage interest rates to increase as devaluing dollars decrease investor demand for mortgage-backed bonds used to fund home loans. Higher mortgage rates place additional financial strain on buyers who find it increasingly difficult to meet monthly loan payments.
Inflation can also raise material costs associated with construction projects, making them more costly to construct new homes or renovate existing ones.
Real estate acts as a natural hedge against inflation. Property prices often follow inflation’s increase, creating opportunities for landlords. Furthermore, rising mortgage rates make purchasing homes less feasible, encouraging more people to rent instead. It’s vital for real estate investors to monitor inflation and mortgage rates closely as their portfolio continues to develop.