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How Real Estate Investments Offer a Hedge Against Inflation

Times of economic turmoil typically send investors looking for safe, alternative options to grow their money and protect against market volatility. With interest rates at a 40-year high and uncertainty surrounding both the financial and political climates, some savvy investors are ready to make a change to their portfolios. Real estate investments are one option that can help shield against the fallout from inflation, but what makes it such an attractive option for so many?


Real Estate and Inflation

Real estate investments can actually benefit from inflation in a number of ways. Those investing in multifamily rental properties, for example, can increase rents based on inflation to increase cash flow for their assets. The national vacancy rate for residential rental units has decreased by 18.6%, while rents have steadily increased across the country. Real estate investments with fixed-rate mortgages can see better cash flow as rents increase, as the cost of ownership remains the same while the monthly income goes up. These conditions make investing in real estate, such as a REIT, a unique way to not only hedge against inflation, but to reap some of its unexpected benefits. 

More Predictable Market Conditions

While trading on the stock market can see wild swings on a daily basis, the real estate market tends to be more predictable and controlled, making it easier for investors to make choices that work with their financial goals and budgets. Real estate tends to have a low correlation with equities, providing a meaningful way to minimize risk in your portfolio. This essentially means that real estate investments don’t mirror the performance of stockholder shares in companies. By diversifying your portfolio, you can help protect against volatility that might come with investments in growth stocks, which may not do well in times of high inflation. 

low correlation investing

Unique Types of Real Estate Investments

Making the commitment to purchase a real estate property as an individual can be a big decision, even in the most favorable market conditions. Inflation can have an impact if market rates go up or if lenders become hesitant to extend credit for large asset purchases. However, this doesn’t mean that individual investors can’t use real estate as a hedge against inflation. Choosing a REIT with a diversified portfolio of assets lets you put your money into a strategic plan for long-term growth. 

Just as with traditional real estate purchases, investing in a REIT isn’t as liquid as putting your money into the stock market, which may mean less volatility and more dependable growth. With REITs, you don’t assume the risk on your own, and your risk isn’t limited to the potential performance of just one property. You can reap the rewards of increased rents and increased property value during times of inflation while diversifying your personal portfolio and relying less on the volatility of stocks and bonds.

Real Estate Versus Savings

In the past, times of inflation and higher interest rates have spurred increased interest in placing assets into high-yield savings accounts and other savings vehicles. The global pandemic may have changed the way individuals are able to save money for the near future. With so much money being saved by remote workers who didn’t need to spend extra money on commutes and other work expenses, Americans were able to put significant amounts of savings away

With cash on hand, banks have little need to increase APY rates to attract savers. This means investors who might have previously moved money away from stocks and bonds are left looking for other options. Investing in real estate, particularly multifamily rental properties, provides an opportunity to grow your wealth without limiting yourself to low rates paid out by money markets and CDs through your bank. 

multifamily returns

Every investor must make the decisions that make sense for their own individual finances, and it’s important to discuss any major money moves with your financial advisor. In times of high inflation, real estate investing through REITs can be a critical part of that conversation and a unique way to diversify your portfolio.

Don't miss out on the latest investment trends!

Get them in your mailbox every month.

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