Investing in real estate will keep your money safe from inflation.
Inflation is a calculation of the rate at which a currency loses value, and the costs of goods and services rise. We’re currently experiencing a period of inflation because of the scarcity of supplies, labor, and the slowdown of supply chains. By strategically investing your money, you can hedge against inflation by offsetting the dropping value of money and protecting your purchasing power.
When I was a little boy, pennies were precious. I remember that whenever I found one, I would hide them in the backyard to keep them for a rainy day or tough times. The only problem was that when I searched for them later, I couldn’t find them! You can imagine how heartbroken I was. It’s funny now, but sometimes I feel like we do similar things with our money today. We bury our money somewhere it isn’t doing much or can’t be used later because we don’t know what it’s doing. Housing is different.
Real estate is one of the best types of assets you can invest in to hedge against inflation because it has intrinsic value—there will always be demand for homes. Additionally, as inflation increases, so does the value of the property you own, and you can charge more rent. Mortgage interest rates are still historically low, so now is a good time to lock in a low rate.
Over time, you’ll also see your mortgage payments decline if there is a period of sustained inflation. This is known as depreciating debt.
“Real estate is a great investment to hedge against inflation.”
For example, if your fixed-rate loan payment is $100,000 every year, it may only be worth $80,000 by the end of your tenth year. This emphasizes why it’s important to consider how long you plan on staying in your home. Closing costs are expensive, and if you don’t build up enough equity to offset those costs, you could lose money when you sell later.
However, since property is a physical asset, it isn’t very liquid. A more readily liquid alternative you might want to consider investing in is real estate investment trusts (REITs). REITs are managed by companies that own and manage properties. A big advantage to investing in REITs is that their prices shouldn’t be as affected as other investment opportunities when rates increase. This is because their operating costs won’t be affected, so their prices stay relatively the same.
All of these factors make real estate a great investment to hedge against inflation. If you have any questions or you’d like to discuss a personalized plan for how you can hedge against inflation, don’t hesitate to reach out to me by phone or email. I look forward to hearing from you.