Investors love real estate because it acts as a hedge against inflation. This occurs for several reasons:
One, on an historical basis, housing prices rise just as fast or faster than the rate of inflation. Two, although investors can’t always raise rents to account for inflation (due to fixed-rent leases of one year or more), the value of the property itself will increase. Three, when real estate investors have a fixed-rate loan, expenses will stay the same, and they pay back that loan with money that’s worth less than what they borrowed! In effect, it’s a form of debt reduction. It just doesn’t get any better than that!
Inflation should be moderate in order to benefit investors. Hyperinflation or its opposite – deflation – are definitely bad news for everyone.
When hyperinflation occurs, investors find that investment properties cost more money to maintain than the rents they collect from those properties. When deflation occurs, real estate prices drop or even tumble into the basement. In either case, the investor’s best strategy may be to stay out of the real estate market until inflation rates return to reasonable levels.
The bad news about inflation rates is that they’re notoriously difficult to predict because so many different factors go into creating inflation. The good news is that those rates won’t affect your determination of what market cycle you’re in or the investment strategy you use. Overall, the best way to keep tabs on the inflation rate is to check its history through newspapers, financial magazines, and online sites like www.inflationdata.com.
The bottom line is this: Low-to-moderate inflation rates are a great benefit for the real estate investor.
