Here are a few reasons why real estate can serve as a valuable asset class
The following article has been supplied by RCN Capital.
One of the most intimidating words for investors and entrepreneurs that comes up in the investment space is inflation. The International Monetary Fund defines inflation as the measure of how much more expensive a set of goods and services has become over a certain period of time. As prices rise, the value of currency decreases, making it essential for investors to seek strategies that can protect their wealth.
Real estate investing has long been recognized as a reliable hedge against inflation due to its immediate cash flow opportunities and potential for long-term growth. According to Investopedia, two of the top nine protections against inflation are real estate investment trusts and real estate rental income. Here are a few reasons why real estate can serve as a valuable asset class to safeguard against the impacts of inflation.
Passive rental income
One of the biggest reasons any investor decides to purchase real estate investment properties is because they understand that rental income generated from these properties can change their fortunes in life. With a robust portfolio of cash-flowing properties, the passive income that can be produced is one of the strongest ways to combat inflation. While not all investors gravitate towards the long-term rental strategy, the ones that do certainly realize the benefits.
Rental properties can provide a consistent cash flow stream that has the potential to increase over time. As inflation occurs, rental prices tend to rise, allowing landlords to adjust their rates accordingly. This ability to increase rental income helps investors maintain their purchasing power. This is where investing in real estate really shines through as a hedge against inflation. When inflation hits, having that liquid capital to invest more and grow your portfolio is the biggest challenge. Investors with no passive income can run the risk of stalling their growth as they wait out the inflation period. Investors that are taking advantage of passive wealth generation through rental income can remain active and continue to grow in a time when most other forms of investing are regressing.
Portfolio diversification offers protection
Diversifying your investment portfolio can be looked at in two different ways when investing in real estate to protect against inflation. First, there are a few different avenues to success when strictly investing in real estate. Diversifying your investment opportunities can open a lot of doors for investors, especially during inflation. First, fix and flip investments allow investors to increase capital at a much quicker clip than other forms of investing. With the right loan in place, investors can make tens of thousands of dollars in a matter of months. On the other hand, the stable growth that comes with multiple rental properties is also appealing to investors. Fix and flips can become harder to navigate during inflation but are still a viable option. Long-term rentals can be an asset no matter what the financial market is dictating because tenants are always out there and will pay higher rents to secure living arrangements if that’s what the market is dictating. Most people would rather rent during periods of inflation than commit to buying on their own.
The second way diversifying a portfolio through real estate helps is because it is in its own class when it comes to types of investments. Including real estate in an investment portfolio can provide massive benefits because of this separation. Real estate has a low correlation with other asset classes, such as stocks and bonds or commodities that are invested in through exchange-traded funds (ETFs). During periods of inflation, when those traditional types of investments may suffer, real estate can act as a counterbalance, helping to stabilize the overall portfolio. Diversification across different asset classes is crucial for managing risk and protecting against the erosive effects of inflation.
Taking advantage of appreciation and leverage
It’s no secret that one of the most positive aspects of investing in real estate is that it is typically an appreciating asset class. Historically speaking, real estate has shown a tendency to appreciate in value over the long term. Property values tend to rise due to factors such as population growth, urbanization, and limited supply in desirable locations. By holding onto real estate assets, investors can benefit from capital appreciation, which acts as a hedge against inflation. As an investor, you can control these valuable assets and use these real estate investments to your advantage. If inflation is affecting a specific area, there is a potential to increase monthly rents and generate more passive income. Also, there may be specific suburbs that see a spike in home value due to inflation that wasn’t previously available. Selling off that property and making a major profit could be an opportunity that presents itself to real estate investors.
The other angle that comes into play which inflates the value of investing in real estate is the leverage or borrowed funds that investors can take advantage of. Real estate investing offers unique opportunities for leveraging borrowed funds. By using a mortgage to finance a property purchase, investors can amplify their returns. In an inflationary environment, the value of the property and rental income may increase, while the mortgage debt remains fixed. This leverage can enhance an investor's ability to hedge against inflation and potentially generate higher overall returns. Fixed rate mortgages are vital to a real estate investor because of this. There are loan options out there that allow for potential changes in the interest rate over time, and while these may be enticing, when inflation hits and the rate balloons this can have a negative impact on real estate investments. Always look for a fixed rate to avoid this pitfall.
A strategy that is growing in popularity which takes advantage of appreciation and leverage, and can really see an investor’s return on investment skyrocket. It is known as the BRRRR Strategy which stands for Buy, Rehab, Refinance, Rent, Repeat. What this strategy entails is investors buying properties and renovating them in order for the property to appreciate in value much quicker. After the rehab work is complete, an investor can refinance into a fixed rate mortgage and the rental income can be amplified because the property was renovated. If the process is repeated, investors should have a portfolio full of properties that cash flow at a steady clip with loans that are stable due to the fixed rate over a long period of time. These types of portfolios are one of the strongest ways to hedge against inflation.
Invest in real estate to counter inflation
Real estate investing has proven to be a reliable hedge against inflation due to its potential for rental income, appreciation prospects, leverage opportunities, and diversification benefits. As an investor, it is essential to consider the long-term advantages of including real estate in your portfolio to safeguard against the erosive effects of inflation. However, it is crucial to conduct thorough research, seek professional advice, and carefully evaluate market conditions before making any investment decisions. Reach out to lenders such as RCN Capital for more information and strategies about how to protect against inflation by utilizing real estate investments.
Learn the top 10 real estate investing strategies in this article.
