December 9, 2019
Inflation is a growing concern for many people, including those who are working to build their portfolio and savings. Hard assets, such as gold and silver, have long been considered safety nets to hedge against inflation. Real estate fits into this area as well. Real estate is a type of commodity. As such, there is a limited supply of it, and it will continue to grow in value, most of the time, steadily. As inflation continues to rise, consider the value of making a switch to real estate investments.
Inflation, in its simplest of terms, is the growing cost of products and services. When the general price for most goods and services rises, that’s an indication that companies are feeling more confident in the demand from their customers. They increase prices. It also occurs as a result of suppliers’ increasing prices.
As these goods and services rise in value due to inflation, investments do not. Rather, most types of investments will see that their asset is losing value as inflation rises. We track this in the Consumer Price Index or CPI. It’s common, for example, to see fixed-income debt instruments and bonds drop in value. That can place a significant strain on your portfolio.
There are two key elements that cause inflation to occur. Typically, it is brought on by a growing economy and monetary debasement. As the economy thrives and continues to expand, companies push prices upward. A component of this occurs as a result of companies being able to increase prices because consumers are spending and demand is up. Another factor is monetary debasement. This happens when a country prints money, making the value of currency lower.
No matter why it happens, we recognize that in today’s society, inflation is very much a talking point. It’s a concern because the economy has done well for some time, and that is a clear indication that the cost of goods and products is likely to rise.
As inflation grows, many consumers worry about what will happen to their investments. Making a move to real estate could significantly reduce some of your risks. Real estate is a hard asset, one that cannot be produced in greater volume to meet increasing demand. When you own real estate, an asset that most people want to own, it’s unlikely to see any drop in value due to inflation itself.
There are, of course, other factors that can cause real estate values to fall. Yet, even when home values fall somewhat due to crashes and bubbles bursting, that drop typically does not remain. Through those up and down movements, real estate typically comes back rather reliably.
Investing in real estate makes solid financial sense for many reasons. Because it is a hard asset and commodity, the value of real estate is likely to remain high even if the economy begins to show signs of increasing inflation. However, that doesn’t mean you have to run out and buy a home.
There are multiple ways to invest in real estate. You can, of course, own property outright. Your home, for example, will always be a valuable asset as long as you maintain it. You can also invest in REITs and real estate equity.
Real estate equity and real estate investment trusts are a bit easier to get into from the average consumer’s investment portfolio. These are funds and trusts that allow you to put money into real estate to see the same benefits of security from inflation. However, in this method, you are able to broaden your exposure, lowering your risk. More so, with these investments, you don’t have to have a significant down payment to buy the property outright. That means you can move into REITs and real estate equity faster.
Another type of real estate that benefits from inflation increases is commercial real estate. Commercial real estate – like most other forms – will preserve its value overall during periods of higher inflation. In addition to this, if you own and lease commercial real estate, this can be a very lucrative way to increase income in times when you may see your portfolio struggle otherwise. With commercial real estate, you can increase the rental income of the lease over time, increasing the amount of income generated by the property. This creates an opportunity for increasing your income during most situations.
It’s always important to consider your portfolio and investment strategy carefully as the economy and the world around you continue to change. Not every portfolio needs to move heavily into real estate. Some may not need to make a switch at all. In other cases, investments such as gold and silver, as well as other hard assets, can continue to work to reduce some of your risks as well, even as inflation grows.
There are various strategies available that can help investors to minimize the impact of inflation. What you cannot do, though, is to assume inflation will not impact your investments and strategies. Rather, it’s essential to work closely with your investor to make sure you’re protected.
Right now, in the current economic climate, it is likely that inflation will create concern for some investors. Yet, by taking action now, it’s possible to create a strategy that may involve real estate investments to reduce some of the risks you are currently exposed to within your portfolio.
As an equity REIT, our team at DiversyFund is here to help you. There are plenty of reasons to consider investing in real estate as a comprehensive tool for pushing back against inflation. Yet, you should make these decisions based on your unique financial place and goals. Let our team at DiversyFund work with you to find that balance. Contact us today to learn more.