There’s no doubt that inflation is on the minds of many Americans these days. The rising cost of living makes it hard to make ends meet, let alone save for the future and invest. As the stock market gets hit hard, many are wondering where their money could receive a better degree of stability as inflation rages and perhaps a recession looms.
Historically, real estate has proven to be a stable investment during inflation. Whether it’s a single family home, multifamily or even commercial real estate, many investors are paying more attention to the asset class for its stability and tax benefits while stock markets look murky for the foreseeable future.
When thinking about investing in real estate amid inflation, Jacky He, CEO of real estate investment firm DMG Investments, explains, “in the rising interest rate environment we are currently in, people are expected to choose to rent instead of committing to purchasing a home. This provides multifamily housing investors with a constant supply of renters.”
The consistent demand for housing and real estate will likely always exist. As Mark Twain famously quipped, ‘buy land, they aren’t making it anymore.’ But evaluating if real estate could be right for your portfolio is more complex than that. One also must take into account the need for liquidity, their tax strategy and also the time they can devote to managing a real estate investment, which tends to be more intensive than a stock portfolio. Nonetheless, when prices are rising, property can often be a favorable place to have your money.
Of course, there are always risks involved in any investment. But if you do your homework and choose wisely, investing in multifamily real estate during periods of inflation can be a smart move.
Why is investing in multifamily real estate a good choice during periods of inflation?
There Is Always a Demand for Rental Properties
People will always need somewhere to live. That means there will always be a demand for rental properties, regardless of economic conditions. That’s proven to be true among millennials and Gen Z who rent instead of own for a number of reasons, including burgeoning student debt costs and challenging labor markets.
Choosing markets with high demand for rentals can help ensure a successful investment. “When making a multifamily acquisition, we choose markets with strong fundamentals such as low vacancy rates,” He stated.
Your Work Can Add Value to Your Investment
Another benefit of investing in real estate is that you can add value to your investment, which appreciates the price. It can also lead to increases in the income your asset produces. For example, you can renovate your properties and subsequently charge higher rents. This is a benefit enjoyed by real estate owners that is not replicated in the stock market or many other asset classes.
You’ll Have More Control Over Your Investment
When you invest in real estate, you’ll have more control over your investment than if you were to invest in other types of assets. For example, you have more choice in who can rent your units. You can adjust the rate of rent. And if you ever need to sell your investment, you can do so without restrictions.
Multifamily Real Estate Usually Appreciates Along with CPI
If you’re thinking about multifamily as the category of real estate you’d like to enter, there are many benefits unique to that category. One particular benefit is the correlation of rental prices to inflation. Buying multifamily real estate is a great way to hedge against inflation because it usually appreciates along with the CPI. As rental income goes up, the value of your property increases with it.
Real Estate Also Has Tax Advantages
Another benefit of investing in multifamily real estate is the tax breaks afforded to its owners. Rental real estate owners are allowed to depreciate the value of their property on their taxes, which helps offset taxes owed on some of their rental income. There are also other opportunities to save on taxes when selling your property such as through a 1031 exchange, which allows you to roll the proceeds from your sale into a similar property without owing capital gains taxes.
While there are many benefits to real estate investing, which can be particularly amplified in inflationary periods, it’s important to know what your objectives and risk tolerance is and design a strategy that suits your particular situation.