Is Real Estate Still a Good Investment During High Inflation?

How to Invest During Periods of High Inflation

As any of you know who’ve been to the grocery store or the gas pump recently, inflation is here and it’s affecting the price of almost everything. With rising costs, all of us have had the experience of not being able to buy the same items we were able to a year ago. With the cost of borrowing money now being higher, some of you may be wondering if it’s even possible to still turn a profit by investing in real estate. So here are a few ideas to help you invest.

Buy a rental property

With the high cost of houses and recently hiked up interest rates, you might be thinking that it’s too late to buy a rental property and operate it profitably. While buying a rental property is more expensive in most markets than it was a year ago, the fundamentals of using real estate to achieve passive income are still the same. Currently, the average APR on a 30-year fixed mortgage is 5.54%. This may seem sky high to newer investors, but that’s still far less than 16.63%, which was the annual average interest rate for a 30-year mortgage in 1981. Even though they dropped the following year, they were still hovering at around 10% at the end of the decade.

Our current interest rate hikes haven’t nullified the advantages of investing in real estate. Rental properties are still an excellent hedge against inflation. Having fixed debt – event at 5.54% – will still allow you to hedge against inflation and capture the benefits of rising rents. Just make sure that you know how to run numbers on a property to determine if you’ll be able to turn a profit after you pay your expenses, including your mortgage, property taxes, maintenance, and upkeep.

If you’re struggling to come up with a down payment, you may wish to partner up with a friend. In the last decade, there’s been a huge increase in the number of people who are pooling their resources with a friend to buy property together. Of course, this is a serious financial commitment, so you’ll want to pick someone who’s financially responsible and have some candid conversations about what you can each contribute and what the breakdown of responsibilities will be as co-owners of a rental property.

Invest in REITs

Real Estate Investment Trusts (REITs) are companies that own, operate, or finance income-generating real estate. They pool the resources of many investors who then receive dividends from their investment without ever having to buy anything. A lot of REITs are publicly traded and investors can buy and sell shares in them, just like stocks. It’s the easiest way someone can invest in real estate, and currently there are approximately 87 million people in the US who have invested in REITs through their retirement plans and other investment funds.

REITs tend to have a specific focus of the types of properties they hold. There are also diversified REITs that may hold different types of properties. These can include apartment complexes, single-family homes, retail centers, office space, data centers, healthcare facilities, hotels, office buildings, self-storage, warehouses, marijuana growing facilities – you name it. The main advantage of an REIT is that you are able to buy into one at any dollar amount you like. Also, because your investment is tied into real estate, your dividends will be based in part on what the properties are renting for, and rents tend to increase more quickly than inflation.

There are, however, some drawbacks to investing in REITs. When contemplating which type of REIT to buy, be certain to find out which types of properties they’re investing in. About 80 percent of REITs hold commercial and industrial real estate, including offices and shopping centers, which have taken a hard hit during the pandemic. Also, the correlation between rising rents and an REIT’s profits isn’t always a straight line. A lot of REITs are very sensitive to interest rates, because many REITs also hold mortgages on real property.     

Conclusion

Interest rates may seem high now, but that’s only because we’re exiting a period in which they were historically low. It may be tempting to dismiss real estate investing as a way to create passive income, but that would be an oversimplification. Even with our constantly changing economy, real estate is hard to beat as a consistent and reliable source of passive revenue.