Want a Hedge Against Inflation? Be a Landlord. Right Now.

Want a Hedge Against Inflation? Be a Landlord. Right Now.

Inflation worries abound right now. There is unprecedented liquidity in the market from all the government stimulus money and loose monetary policy from the Federal Reserve. The Fed has stated that the recent rapid consumer price increases are transitory, yet many fear that inflation will be here much longer than “transitory” lasts.

So, how can you protect your portfolio of assets against inflation while building wealth? Be a landlord. Now. If you are a landlord, buy more units. Now. If you are new to owning investment real estate, buy your first unit(s) now.

Why are rental properties a great hedge against inflation? Let me count the ways:

  1. As inflation rises, typically so do property values.
  2. As inflation rises, typically so do rents.
  3. If you have a mortgage loan with a fixed interest rate, the interest rate stays the same while you can periodically raise the rents.

There are other great reasons to be a landlord:

  1. The tax advantages, like depreciation and mortgage interest deductions, can save you a lot of money.
  2. Interest rates are at historical lows, even if you factor in the likelihood of the Fed attempting to raise rates.
  3. Your property is insured, so your asset is protected against most types of loss.
  4. There is an acute shortage of housing in many places in America.
  5. If you don’t want to manage tenants, you can find a property manager to do the job for you.

It’s simple supply and demand. The U.S. Census found that 12.3 million new households were created in America between January 2012 and June 2021. However, only 7 million new homes were constructed during that period. The U.S. has a shortage of about 5.3 million homes. When supply is low and demand is high, prices must increase. The shortage is even more pronounced in the market of smaller, entry-level homes, as builders tend to build larger homes due to better profit margins.

A new report in October 2021 from Goldman Sachs projects that home prices will increase another 16% by the end of 2022. The housing market is already at record highs, with demand far outstripping supply. Many markets have seen 20% price increases from 2020 to 2021. That rapid pace is not sustainable in the long run, yet it can continue in the short run. The report by Goldman Sachs states that low interest rates, strong demand from buyers, and low inventory of homes will combine to push housing values up dramatically for another year. Additionally, rental values are expected to climb per Goldman’s analysts.

The report also projects that more buyers will eventually drop out of the market (and continue to rent). The supply and demand imbalance will ultimately normalize in the long run as more homes are built and more buyers put off their decision to purchase.

For those who are waiting for housing prices to pull back around 5% or so before they buy, recognize that it is more likely that housing prices will go up another 15% before they pull back 5%. If you are a landlord with a long term time horizon (you’re buying and holding indefinitely), then the fluctuations in the market values and interest rates should not matter at all. What matters is that you have strong positive cash flow.

If you are looking to build wealth, or at least hedge your asset portfolio against inflation, be a landlord. Right now. You’ll thank me later.

Tai DeSa is a graduate of The Wharton School of the University of Pennsylvania.  He became a full-time real estate investor in 2004 after serving in the U.S. Navy.  Tai has made colossal mistakes in investing (and learned some things along the way).  He has helped hundreds of homeowners avoid foreclosure through successful short sales. Check out Tai’s books on Amazon.com. Tai may be available for coaching and speaking engagements on a variety of real estate topics.  Send an email to tai@investandtransform.com.

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