Inflation is a hot topic at the moment. So how will Inflation Impact Real Estate? While it often sounds complicated, inflation simply refers to an increase in prices over a certain period of time. As a result, when inflation increases, purchasing power decreases.
Inflation hit a 40-year high in March, with a twelve-month rate of 8.5%. While it declined slightly in April to 8.3%, it continues to be alarmingly high and a source of major market volatility.
As interest rates rise and the stock market flounders, the key question for many Landlords is what does rising inflation means for real estate investors? While it brings some challenges, a primary takeaway for Landlords should be that real estate, particularly residential real estate, tend to perform well in periods of high inflation.
Real Estate Is a Good Investment in Periods of Inflation
Historically, real estate investments have performed well in periods of inflation, and income-producing rental properties generally perform especially well. The primary reasons are increased property values, increased rental demand, and increased rent prices. Here’s a more thorough look at these factors.
- During periods of above-average appreciation, property values usually keep up with inflation. This means that rental properties appreciate at higher rates than normal.
- There tends to be less real estate development when inflation is high because of the increased cost of labor, materials, and machinery. The result is increased demand, which pushes property values even higher.
- This increased demand is pushed even higher by rising interest rates. Generally, interest rates increase when inflation increases. That is true in the current environment, as the Fed is raising rates in an effort to curb inflation. The result is mortgages are more expensive and it becomes more difficult for buyers to purchase a home. This means more people opting to rent and increased demand for rental properties.
- Inflation pushes rent prices up. In fact, rent increases have historically exceeded the increases of other commodities, including food and energy. This means more income for Landlords and better returns.
Inflationary Periods Do Present Some Challenges for Investors
Despite these benefits, there are some negatives that come with periods where Inflation can Impact Real Estate. While it often sounds complicated, inflation simply refers to an increase in prices over a certain period of time. Borrowing becomes more expensive, which can be a challenge for investors looking to expand their portfolios. Additionally, for developers, the increased cost of building materials and labor makes new construction difficult. Finally, investors that have vacation rentals might see a downturn in business. As money gets tighter for everyone, there’s a decrease in vacation and travel spending.
For investors, it’s important to be aware of the challenges, anticipate some negative shifts, and prepare for them.
Planning Your Next Move
Despite the uncertainty in financial markets, there’s plenty of good news to be had for real estate investors. Here are a few principles to guide you through this period:
- Stick with buy and hold real estate strategies. Demand for rentals, rent prices, and home values should all rise in the months ahead, increasing investors’ ROI.
- Don’t get intimidated by inflation and pass up opportunities. While expanding your portfolio might be more expensive in the months ahead, there will still be good opportunities. Don’t let sticker shock overwhelm you. Instead, do plenty of research, know your market and potential ROI for properties, and look for opportunities.
- Speaking of opportunities, one of the best things investors can do during periods of high inflation has some funds available. Opportunities will come, so make sure you’re ready to capitalize on them!
We’re Here to Help
Whether you need to find a Tenant for a new rental property or renew a Lease for one that you’ve owned for a few years, we’ve got the forms and tools you need. Visit ezLandlordForms.com to start a Tenant Screening, create a state-specific Lease Agreement, or get all of the property management forms you need.
Emily Koelsch, ezLandlordForms Contributing Writer
Emily Koelsch is a freelance writer and blogger, who primarily writes about business, real estate, and technology.