Turning to Real Estate in an Inflationary Economy


You don’t need anyone to tell you about the damage inflation has done over the past several years. It’s been quite the rocky road since the start of the pandemic, with shifting supply chains and tumultuous markets culminating in a surge of inflation that our country hasn’t seen in decades. 

But here’s the thing about investing: There are gains to be made in any type of market, whether there’s inflation, growth, or anything in between. The challenge is knowing where to put your cash to work.

The Challenge of Inflation With Traditional Investments

High inflation can pose unique challenges for traditional investment strategies. Fixed-income securities like bonds may see their real value diminish, and the uncertainty associated with inflation can lead to volatility in stock markets. In these scenarios, investors often seek refuge in tangible assets that can act as a hedge against rising prices.

But here’s the thing about inflationary markets – you can’t leave your cash in, well, cash. Leaving your cash sitting in a checking account that’s making .001 percent means you’re actually losing money every month. 

This means you have to find the right types of investments to put your cash to work so that it grows relatively safely and without excessive risk exposure. This is where real estate comes into play.

Turning to Real Estate Investments

In a high inflationary environment, rental property investing emerges as a viable and attractive option. With its combination of potential appreciation, steady rental income, and tangible asset value, real estate often provides a financial safeguard. 

Historically, real estate has shown incredible resilience and growth, even during high inflationary periods. That’s because property values often increase in tandem with (or sometimes exceed) the rate of inflation. This is due to the fact that housing is still the ultimate necessity in the marketplace. And during tough economic times, rentals become more in demand than other types of properties. As a result, real estate investors holding rental properties in their portfolios come out on the winning side of the equation.

Another reason real estate investments thrive during inflationary periods is their tangible nature. People like tangible assets during times of uncertainty. Real estate has a very physical nature to it. You can walk through it, touch it, and use it. This makes it more valuable to people than, say, cryptocurrency or stocks that can’t be touched.

Choosing the Right Real Estate Investments

Now, don’t get us wrong – real estate isn’t an automatic investment. In order to be successful with real estate investing, you need a plan. This means choosing the right properties and then hiring a property manager to oversee the day-to-day tasks on your behalf.

Here are three of the most important factors to consider when choosing the right rental properties to put your cash to work:

  1. Location, Location, Location

Real estate always comes down to location. Understanding the local real estate market and where a specific property is situated is perhaps the single greatest determining factor in its ability to be a smart long-term investment for you and your portfolio. Analyze market trends, future development plans in the area, zoning restrictions, population growth, etc.

  1. Property Type

The type of property you invest in can have an impact on your ROI. For starters, you’ll want to choose between residential and commercial properties. Unless you have a lot of cash on hand, you’re most likely going to want to pursue residential real estate. There’s a lower entry point, and the income is usually more stable and predictable. 

Inside the residential real estate class, there are different niches you can pursue. The most common distinction is between single-family and multi-family units. A single-family property is a single residence, whereas a multi-family property may be a duplex, triplex, quadplex, or even a small apartment building. 

  1. Capitalization Rate

There are a couple of ways to analyze the potential return on investment you’ll get from a property.

Cash-on-cash return is a metric that helps investors understand the annual return on the cash invested in the property, considering rental income and expenses. A higher cash-on-cash return indicates a more profitable investment.

Then there’s capitalization rate, or cap rate, which provides an estimate of the potential profitability and risk of a property. It’s calculated by dividing the net operating income by the current market value of the property. A higher cap rate may signify higher risk but also greater potential returns.

Adding it All Up

There’s no such thing as a sure-fire investment. (After all, it wouldn’t be called an investment if there wasn’t an inferred risk attached to it.) But if you’re looking for a way to put your cash to work in an inflationary environment like this one, real estate is one of the best options. Do your due diligence and you’ll set yourself up for success!

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