Why You Should Invest in Real Estate Amidst Soaring Inflation

Inflation is characterized by a gradual and sustained increase in the general price level of goods and services within an economy. As a result of inflation, the purchasing power of a currency declines over time, meaning that the currency buys fewer goods and services than it did in the past.

This is not only caused by currency devaluation, it can also be caused by economic growth. While the latter is generally a good thing, since inflation affects individuals by reducing their purchasing power, the impact can be particularly challenging for low-income individuals, who may struggle with rising prices of essential goods like food, gas, and rent.

Inflation is a real threat to your financial security. It can erode the value of your savings and investments and if you don’t take steps to protect yourself, inflation will likely cause you to lose money over time. This is why, investing during periods of high inflation is important because it allows investors like yourself to earn a return on their investment while also protecting against inflation’s negative effects. In particular, investing in real estate during times of high inflation can provide numerous benefits, including asset appreciation, stable cash flow, tax advantages, leverage opportunities, and portfolio diversification.

Real estate as a potential investment option

Real estate is a long-term investment, meaning you should expect to hold onto it for at least five years before selling. Real estate is considered liquid because it’s easier to sell than other investments like stocks or bonds which you’d have to go through an exchange to trade. Also, unlike stocks, bonds, and other investments, real estate is a tangible asset that you can touch and feel. This makes it a more secure investment, as it is less likely to lose value in the event of a market crash.

The value of real estate tends to appreciate over time, so it makes sense that many people choose this as their preferred way of growing their wealth.

Understanding Inflation and Its Effects

Inflation happens when the supply of money increases faster than the demand for goods and services, which causes those goods and services to be more expensive.

Inflation can be caused by:

• An increase in the money supply
• A decrease in production capacity or output (more people want something than it is available)

Inflation affects your investments because it means that your money will buy less over time as its value decreases due to inflation rates higher than interest rates paid on savings accounts or other investments like bonds or stocks.

There are a number of things that governments can do to control inflation, including:

• Monetary policy: This involves raising or lowering interest rates, which can affect the amount of money in circulation.
• Fiscal policy: This involves increasing or decreasing government spending, which can affect the demand for goods and services.
• Price controls: Governments can also impose price controls, which are limits on how much businesses can charge for goods and services. However, price controls can be ineffective and can lead to shortages.

Real Estate as a Hedge Against Inflation

Real estate is a tangible asset with inherent value in land and property. It’s also highly liquid, meaning you can sell it at any time with ease, making it an excellent hedge against inflation. For example, if you bought an apartment building in 2000 for 20 million and sold it in 2023 for 90 million, your return on investment in rental property would be over 100% over 23 years!

In addition to its potential as an inflation hedge, real estate has many other benefits:

Benefits of Investing in Real Estate During Inflation

• Hedge against inflation: Real estate is often considered an effective hedge against inflation because property values and rental income tend to rise along with the general price level. As the cost of living increases, so do the prices of homes and rental rates, helping to protect your investment from the eroding effects of inflation.
• Asset appreciation: In an inflationary environment, the value of real estate assets typically appreciates at a faster rate than the increase in the general price level. This appreciation can lead to significant capital gains over time, making real estate an attractive long-term investment.
• Stable cash flow: Real estate investments, particularly rental properties, can provide a stable source of cash flow. As inflation drives up the cost of living, landlords can charge higher rents, which in turn increases the income generated from the property. This steady cash flow can help offset the impact of inflation on your personal finances.
• Tax advantages: Real estate investments offer several tax benefits, including deductions for depreciation, mortgage interest, and property taxes. These deductions can help to reduce your taxable income and provide some relief from the financial pressures of inflation.
• Leverage: Real estate investments can be leveraged using borrowed funds to increase potential returns. In an inflationary environment, interest rates are often low, making it more affordable to finance real estate investments. By leveraging your investment, you can potentially achieve greater returns while minimizing the impact of inflation on your purchasing power.
• Diversification: Real estate investing can help diversify your investment portfolio, reducing your overall risk exposure. A well-diversified portfolio is better equipped to weather the ups and downs of the economy, including periods of high inflation.

Strategies for Investing in Real Estate During Inflation

Buy-and-Hold

The best way to invest in real estate during inflation is to buy a house and hold it as an investment. This strategy is called “buy-and-hold,” and it involves purchasing a property for its long-term value rather than its immediate cash flow potential.

Fix-and-Flip

If you don’t have the capital or credit score necessary for the buy-and-hold approach, consider flipping houses instead. Flipping means buying a property at an affordable price, renovating it, and then selling it at a higher price–usually within three months or less of your purchase date (though some people will flip houses over longer periods). You can make money by fixing up homes in need of repairs or remodeling before putting them back on the market; however, keep in mind that this kind of investing comes with considerable risk because there’s no guarantee that buyers will see value in what you’ve done.

Real Estate Investment Trusts (REITs)

REITs are a type of investment that allows investors to own a share of income-generating real estate assets. REITs are required to distribute at least 90% of their taxable income to their shareholders in the form of dividends. This makes REITs a good source of passive income for investors.

REITs can be a good investment for investors who are looking for exposure to the real estate market but do not want to deal with the hassle of owning and managing commercial real estate or properties themselves. REITs are also a good investment for investors who are looking for a way to diversify their portfolios.

If you are interested in investing in REITs, you can do so through a stockbroker. There are a number of different stockbrokers that offer REITs to their clients. You can compare the different stockbrokers to find one that offers the best fees and services.

Here are some of the benefits of investing in REITs in the Philippines:

• Diversification: REITs can help you diversify your portfolio and reduce your risk.
• Income: REITs are required to distribute at least 90% of their taxable income to their shareholders in the form of dividends. This can provide you with steady income.
• Liquidity: REITs are traded on the stock exchange, which means that you can easily buy and sell them.
• Professional management: REITs are managed by professional real estate managers, which can help you reduce your risk.

Of course, there are also some risks associated with investing in REITs, including:

• Market risk: The value of REITs can go up and down, just like the stock market.
• Interest rate risk: When interest rates rise, the value of REITs can go down.
• Property risk: The value of REITs can go down if the properties they own lose value.

Risks and Considerations

While there are many risks involved and considerations to take into account, owning real estate can be a great way to build wealth for your future. However, it’s important that you know exactly what you’re getting into before making any decisions. Here are some key risks and considerations associated with real estate investment during inflation:

• Rising Interest Rates: Inflation often leads to higher interest rates, as central banks attempt to control inflation by raising the cost of borrowing. Higher interest rates can increase the cost of financing real estate investments, which can reduce the profitability of those investments. Additionally, rising interest rates can lead to higher capitalization rates, which may result in lower property valuations.
• Increased Operating Costs: Inflation can lead to higher operating costs for real estate properties, such as increased utility expenses, maintenance costs, and property taxes. If these increased costs cannot be passed on to tenants through higher rents, the profitability of the same investment property may decline.
• Slower Economic Growth: Inflation can contribute to slower economic growth, which can negatively impact the demand for real estate. This may result in higher vacancy rates, lower rental income, and decreased property values, potentially affecting the overall return on investment for real estate developers.
• Market Volatility: Inflation can cause increased market volatility, which can lead to fluctuations in property values, mortgage payments, and rental income. While real estate is generally considered a more stable investment compared to stocks or bonds, it is not immune to market fluctuations.
• Liquidity Risk: Real estate investments are typically less liquid than other asset classes, such as stocks or bonds. During periods of inflation, it may become more challenging to sell a property quickly and at a desirable price, potentially limiting the real estate investor’s ability to exit the investment or reallocate capital.
• Property-Specific Risks: Investing in real estate during inflation does not eliminate property-specific risks, such as location, physical property condition, and tenant quality. These factors can significantly impact the performance of a real estate investment, regardless of the inflationary environment.
• Leverage Risk: Leverage can amplify both capital gains tax and losses in real estate investments. While leverage can enhance returns during periods of inflation, it can also increase the risk of default if the real estate investor is unable to meet their debt obligations due to rising interest rates or declining property values.

Importance of Investing During Inflation

While holding on to your cash is tempting during inflation, investing is actually essential to maintain and potentially grow your wealth. Some investments are considered to be more resistant to inflation than others. For example, real estate can help protect your wealth during times of collective price hikes. Investing in real estate is important for several reasons, including acting as a hedge against inflation, offering a tangible and appreciating asset, generating passive income, providing leverage and tax benefits, and diversifying your investment portfolio. By staying informed and making strategic investment decisions, you can help protect and grow your wealth in times of rising inflation.