07/30/2024
Beat Inflation Using Real Estate
Given the uncertainty of inflation, I've been receiving a lot of questions regarding how to go about minimizing losses. Popular wisdom says that investing in real estate is a good way of protecting your assets against inflation. Although there is some truth to this, the situation is far from simple.
Let's break it down.
Why try to beat inflation?
Simply put, inflation decreases your money's buying power, making it worth less. If you invest that money in a way that allows it to grow at a higher rate than inflation, the value of your money either won't change or will increase.
Inflation usually sits around 2%, but has risen dramatically in the past two years–currently hovering around 7%. This means that if you let your money sit around in the bank, it could be worth less in the future.
Is housing really the solution?
There are a few reasons why housing is unique compared to other investments. For starters, fixed-rate mortgages are beneficial during periods of high inflation. This is because the dollar amount you pay stays the same, even though the value of the money that you pay is going down. This can function as a sort of discount, since you effectively pay less and less over time. This is true even in periods of low inflation, but is especially true of periods like the past few years.
Second, the housing market is fairly stable over long periods, with homes tending to increase in value. Even homes that lost significant value after the 2008 recession were up to their normal level within a few years. This means that selling later on or even renting can be a good way to increase the value of your money in the long term during periods with high inflation rates.
Will this work in the current housing market?
The general characteristics of the housing market are just one part of the equation and don't guarantee that real estate will be a good investment for you in particular.
At the moment, house prices are continuing to rise. This may mean that a property that you could have invested in several months ago is now too expensive and risky to consider. Mortgage rates are also climbing, to make the situation even more volatile.
It’s up to you to determine whether or not to invest in real estate based on your unique situation. However, housing has historically been a useful investment tool in times like these–so it is worthwhile to consider even if you do find a better route for your situation.
While it's a huge oversimplification to say that you should invest in real estate, knowing why others are doing so can be another tool at your disposal. If you want to know more about how this all works, feel free to reach out!
