Inflation, like a boa constrictor, is squeezing us most noticeably at the grocery store and at the pump. Beyond tightening our budget, staying patient until prices eventually decline, and growing more passive income, what else can we do?
Today's post is sponsored by RealtyMogul, who writes how multifamily real estate may be used as a hedge against inflation.
Inflation is a double-edged sword for real estate. On the one hand, inflation acts as a tailwind for real estate prices and rents. On the other hand, inflation that is too high for too long will force borrowing costs to rise, thereby, cooling down real estate prices.
When inflation finally turns, appetite for risk assets will likely reappear. Therefore, while we wait, it's good to get educated about current and potential opportunities.
Recent Inflation Data Points
Inflation is a loss of purchasing power over time. The same goods and services you can buy for a dollar today may cost you more dollars in the future. And right now in 2Q2022, we are dealing with the highest inflation since 1981. See charts below.
To put this into perspective, here are a few examples from the Consumer Price Index. These inflation data points show how this loss of purchasing power is impacting day-to-day expenses today compared to May 2021:
- Groceries are up almost 12%
- Dining out is 7.4% more expensive
- Gasoline costs 48.7% more
- Used cars and trucks are up 16.1%
- Public transportation costs like bus, train and taxi fares are up 7.9%
High Inflation And The Stock Market
In times of high inflation, stock market returns are usually down. In a paper entitled, The Rate Of Return On Everything, published in 2019, it charts the total rates of return for all major asset classes going all the way back to 1870. The researchers found that higher inflation has generally correlated with lower equity valuations, resulting in falling stock prices.
We’re seeing this now. Year-to-date, the S&P 500 is down roughly 20%. In addition, we are seeing increased volatility. One out of every six trading days has closed with a gain or loss of 2% or more for the S&P 500.
And it makes sense – investors are nervous by higher inflation. A recent survey by UBS Global Wealth Management found that almost half of high net worth individuals are highly concerned about a market downturn.
Investors are trying to figure out where the economy will go next. Feeling uneasy, many are starting to stockpile cash and look for other asset classes to invest in.
But what type of investments might provide a hedge against high inflation or even perform better in periods of high inflation?
Multifamily Real Estate As A Hedge Against Inflation
Jilliene Hellman, CEO of RealtyMogul, shares her thoughts with us below. RealtyMogul is a real estate investing platform with members who have collectively invested over $915 million into more than $5.5 billion of real estate nationwide, including 26,000+ apartment units.
With that kind of volume, it's intriguing to hear whether or not she things it still makes sense to invest in multifamily real estate during times like this.
Jilliene recently explained that during times of high inflation, multifamily cash flow and valuations can potentially increase. And this in turn can be beneficial to multifamily investors. Here’s why:
1) Increased demand for multifamily, but not enough supply
During times of high inflation, the cost of construction (materials and labor) typically increases. As a result, this makes building new housing units more expensive. This increases the potential for some developers to postpone building. And these delays can decrease the level of new supply and also make new homes more expensive.
Also, rising interest rates can make mortgages more expensive. The average new mortgage payment has gone up nearly 40% year-over-year. But it's important to realize that the Fed doesn't control mortgage rates, the bond market does.
For the average homebuyer, high construction costs and rising interest rates can lead to more expensive mortgage payments. This can deter potential homebuyers from buying property and keeps more people in the rental market.
2) Rising rents pushed up by rising inflation
An increase in demand for multifamily real estate can potentially lead to significant rent growth in many markets. You have increased demand from baby boomers downsizing and increased demand from workforce housing.
According to Rent.com, nationwide rent prices have continued their year-over-year climb. For example, rent for a one-bedroom apartment is up an average of 26.5%, while two-bedroom rents are up 25.7%.
This is being driven by a continued increase in demand for housing due to demographic shifts including more students graduating college. The continued trend of rising wages, which puts more dollars into the pockets of renters, also increases their ability to pay higher rents.
3) Multifamily leases are short enough to ride or hedge against inflation
Multifamily leases are generally no longer than 12 months long. As leases expire, landlords can attempt to increase rents to existing or new tenants by at least as much as the annual rate of inflation.
Rising rents help to offset rising operating expenses and can potentially lead to stable or increased cash flow and appreciation. This can potentially result in greater returns for investors and a potential hedge against inflation.
Challenges Of Finding Good Investment Opportunities
Many real estate companies pay for an interest rate cap on their floating mortgage interest rate. Given the rising interest rates, these costs have increased significantly and become a material cost item which could reduce returns to investors.
Separately, increased interest expenses can also squeeze returns and reduce cash available for distribution to investors. The hedge against inflation is tougher when you've got to borrow at higher rates.
There is also the additional risk of fire sales of assets with sponsors who did not factor a rising interest rate environment into their pro-formas. They may look to exit rather than hold assets through this period. Personally, I an holding onto my rental properties when inflation is high.
Be sure to do your due diligence before jumping into a multifamily real estate deal if your goal is to hedge against inflation. If you are an equity real estate investor, it's important to understand the capital stack as well.
Invest Passively In Real Estate And Hedge
Historically, investing in real estate was only possible with a sizable amount of money and a time commitment to property management. But the creation of real estate crowdfunding has enabled investors to gain exposure to real estate and potentially earn passive income without the hassles.
Through the RealtyMogul platform, you can get access to a diverse range of commercial real estate deals in markets across the country. Their offerings include multifamily, office, retail, industrial, self-storage, and more.
Each deal also includes transparent, straightforward financials to help you make informed decisions in pursuit of your financial goals.
RealtyMogul also has two non-traded Real Estate Investment Trusts (REITs) available to investors. These REITs provide access to a whole portfolio of professionally managed properties.
Curious to learn more? Click here to see the latest investment opportunities on the platform.
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