How does Inflation Affect My Real Estate Investment Strategy? Part 1
It often feels like we’re always living through a moment in history where we can’t accurately predict what’s going to come next. Will we see interest rates fall sharply? Slowly? Even rise again? Will economic growth grind to a halt? Will we have a recession? Depression? War? When we read even the best of the press, we often only read one opposing view after another, so I think the most useful thing right now is to simply compare and contrast the most probable scenarios, and how they’ll affect us as landlords and investors, then we can pivot as we enter one or the other.
There are various potential situations for landlords to think about – inflation with growth, inflation without growth, deflation, stagflation…
Let’s first look at a simple example – what happens to our investment when we’re exposed to moderate inflation and moderately high interest rates?
Rents go up with wage inflation
‘Shelter inflation’ (better known as ‘rent’) has remained one of the biggest drivers of headline inflation recently. The rises are not only from wage inflation but a trend where people are becoming tenants instead of buying, due to high interest rates.
House Prices tend to go up with inflation
We’ve had a long run of rising prices, but now as interest rates are perceived to be relatively high, the increases are slowing as high prices and interest rates affect affordability and it looks like the cycle is about to change.
Also, the fact that many homeowners are locked into long-term rates under 4% has meant owner-occupiers have been loath to sell – this, coupled with the high cost of living in cities where job growth is most dynamic, means people are increasingly staying put and when they do move, they’re more likely to rent than buy.
So how does this affect landlords?
Tenant Demand increases as would be homebuyers decide to rent.
During high inflationary times, it can be difficult to get a mortgage. High mortgage rates mean buyers have less purchasing power, so many continue to rent. This surge in demand results in increased rental rates, which is great for landlords.
Prices increase from rising rents.
While appreciation is a distinct and separate market analysis, in general, housing prices tend to rise in an inflationary economy. Real estate has intrinsic value; people need to have roofs over their heads regardless of the value of their currency.
There are, however, some potential negatives for a real estate investor in inflationary times and it’s worth taking these into account if you find yourself in this kind of market.
The increased cost of borrowing debt.
To make sure the bank doesn’t get shorted, they’ll charge higher interest rates and offer fewer loans.
Increased costs of building materials.
Between the high cost of borrowing and the additional cost to build, new construction or upgrades/renovations can be a difficult and unpredictable investment during inflation. When pockets get tight, travel usually gets cut from the budget pretty quickly. Vacation rentals, locations that are driven by tourism, or retirement communities may not fare as well as other forms of real estate investing.
Overall, investing in single-family homes during a moderate inflation period combines the benefits of real asset ownership, inflation protection, stable income potential, and long-term wealth accumulation. However, like any investment, it’s crucial to conduct thorough research, consider location factors, and assess the specific economic conditions impacting the housing market before making investment decisions.
Further reading-
Why might Americans be moving less?
Why Potential Sellers Aren’t Listing Their Homes
Next up: Part 2 – What happens when rates fall?
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