You Should be Buying Investment Properties to Hedge Against Inflation in 2022
Inflation rates today are the highest we’ve seen in decades, and no one is certain that we’ll see a reprieve anytime soon. If you’re worried about your investments, or you’ve already pulled out of the stock market because of the risk high inflationary rates cause, you might wonder, now what?
Keeping some of your net worth as cash can provide peace of mind, but cash doesn’t grow and it’s only going to lose value if inflation continues to rise.
One great way to hedge against inflation in 2022 is by buying investment properties. Here’s why.
Inflation Causes Home Values to Increase
If you’ve looked at real estate lately, you’ve likely seen how crazy high the values are getting. That’s all thanks to inflation. What do high values do for you as an investor?
- Lowers your loan-to-value ratio – The lower your LTV is, the easier it is to get financing. Your LTV is the ratio of the amount you borrow to buy the home to the home’s value. For an investment property, this number should be around 75% or lower.
- Builds equity – Rising home values increase your home’s equity fast. Even though you won’t live in the property, you still earn the equity. Your tenants pay the rent which covers the mortgage and the home’s upkeep, and you earn the equity as the values increase.
- Increases capital gains – Real estate is super liquid, but you can sell your investment properties when necessary or when you’re done with them. Since real estate typically appreciates, most people sell their investment property for a gain. The market will determine how much profit you make, but it’s a lot less volatile than the stock market in most cases.
Rents Increase with Inflation
As a landlord, you’re in charge of the rents you charge, but of course, they must be in line with the market rent. Most market rents increase with inflation, though. If you have an expiring lease this year, you can increase the rents according to the competition in the area or if you’re buying a rental for the first time, you can charge higher rents as they increase with inflation.
Not much else will increase as far as your costs as a real estate owner especially if you have a fixed-rate mortgage. This means your monthly cash flow will increase, allowing you to combat the effects of inflation in other areas of your life.
People Always Need a Place to Live
Real estate is always something people will need. Even if rent prices increase, you’ll still have people that need to rent from you. There’s only so much real estate to go around, so there will always be a demand if you invest in an area that is popular with renters.
You can Leverage your Investment
Leveraging your investment makes your money go a lot further during periods of inflation than it would if you invested in the stock market.
For example, let’s say you have $100,000 to invest. You could invest the entire amount in the stock market, but you’ll only get assets that are worth $100,000 at the time of the investment. You then sit on the stocks and hope they increase, but during times of inflation, that can be a tough bet.
Now, if you took that $100,000 and bought a $200,000 home, you’d already have a 50% gain. You’d own a property worth $200,000, but only pay $100,000 for it now. You’ll have a mortgage, but mortgage rates are affordable compared to inflationary rates.
As you pay your mortgage down, you’ll build equity, increasing your net worth. At the same time, the property will likely increase in value, furthering your investment in real estate.
Real Estate Diversifies your Portfolio
Portfolio diversification is the key to coming out ahead anytime, but especially during inflation.
If you put all your eggs in one basket, you run the risk of losing everything if the market crashes. Let’s say you put all your money in technology stocks and the technology industry has a major crisis. You could lose everything you invested because it’s all in one asset.
Even if you diversify your funds into different industries, but still in the stock market the risk is still very high.
Instead, you can diversify by investing your money in stocks, bonds, and real estate. Typically, real estate doesn’t react the same way as the stock market. If the market crashes, real estate values don’t come crumbling down.
Even if real estate values do fall (for example: the real estate crisis of 2008), they always bounce back. If you invest in real estate for the long-term, you’ll likely see a bounce back and a higher return on your investment than any other asset.
But diversifying – putting money in all the assets including real estate is the best way to ensure you don’t see a total loss anywhere.
If you’re looking for a hedge against inflation in 2022, consider real estate. It’s a great way to diversify your portfolio and it offsets inflation better than most other investments. Real estate appreciates with inflation rather than the other way around.
If you were to invest the same money in stocks, chances are your dollar would be worth much less than when you invested because as company costs increase, their profits decrease, which affects stock prices negatively.
Real estate appreciates with inflation and is always something people need. You can be a hands-on or hands-off real estate investor depending on how much involvement you want. As a landlord, you can hire a property management company to handle the day-to-day activities or you can do it yourself.
Overall, though, real estate is one of the most secure hedges against inflation this year. If you’re ready to jump on board and invest in real estate, contact us today to learn about the favorable mortgage loans we offer real estate investors.