The average inflation rate in the United States over the past decade was 1.8%. However, many experts now predict higher rates of inflation in the future due to COVID-19’s impact on the economy. The federal government has injected large amounts of stimulus funds to help businesses that have closed, as well as people who are now unemployed. This scenario is unprecedented. It remains to be seen whether the United States will see near-normal inflation rates or abnormally high ones as a result of these distortions within the normal economy. Real estate investors have options to hedge against inflation, regardless of current economic conditions.

What is inflation?

Inflation is an increase in average prices for goods and services of a certain economy over a period of time. Inflation can also be viewed as a reflection of the decline in the purchasing power of the dollar or another currency unit.

With an inflation rate of 3%, a $600 refrigerator purchased last year will now cost $18 more if it is bought today. It may not seem like much, but if you add up the inflation rate across all your purchases, it can quickly add up.

Inflation can have a variety of effects on the real estate market, and we will explore these throughout this article. However, for the purpose of defining inflation, it is the same. Property that cost $400,000 last year may now cost $420,000 despite no value-adding improvements.

What is its impact on real estate?

Rent rates are likely to rise during high inflation. It can be hard to obtain a mortgage during high inflationary periods. A high mortgage rate means buyers have less buying power. Many continue to rent. Rents go up due to this surge in demand, which is good for landlords. While appreciation is a separate and distinct market analysis, generally, housing prices rise in an economy that experiences inflation. Real estate is intrinsically valuable; people still need roofs to cover their heads, regardless of currency value. You’ll have a long line if you can offer private mortgages at favorable terms.

In times of inflation, the cost of debt can be negative for real estate investors. In order to avoid being shorted by the bank, they will charge higher rates of interest and offer fewer loan options. Another disadvantage is the increased cost of building materials. New construction is a difficult investment when inflation is high due to the high costs of borrowing and building. Travel is usually cut out of the budget when finances are tight. Real estate investments that include vacation rentals, retirement communities, and locations driven by tourism may perform worse than other types of investing.

Investments in inflationary economies

Real estate investing is highly dependent on both the location and the market. However, certain real estate investments are generally better than others when the economy is experiencing high inflation.

  • Renting residential, commercial, and multi-unit properties, as well as single-family homes, will see higher demand and return than usual.
  • Note: The banks may be selling more than usual quantities of goods, which will lead to less competition and lower prices.
  • Real estate investment trusts will also follow market trends and appreciate in value, similar to physical real estate. As a result, they can be an excellent way to spread your investment over a wide range of assets.

It is important to have the funds to take advantage of an opportunity as soon as it presents itself. Inflation has a positive or negative impact on real estate investments depending on the type of investment, market, and other factors. If defaults are high, a lower price on a note may not be worth the risk. Do your research as you would with any investment. Consult your Realtor for the best options in your area.

Tips for buying a home when prices are high

Here are some ways to stretch your budget if you plan on buying soon:

  • Save your money for a down payment in a high-yield account. The Fed’s reaction to inflation has resulted in higher interest rates. Put your down-payment contributions into a high-yield account if you haven’t done so already. Make sure you can easily access your money when the time comes to close your account. Some online savings accounts may take up to three days to release your funds.
  • Look for a lender that charges low or no origination fees. Although it may be easier to obtain a mortgage through your bank, they usually charge an origination, which is often a percentage of the amount borrowed. Most non-bank lenders and online lenders do not charge fees. If you find a fee-free lender that offers attractive rates, then you will save money.
  • Lock in your mortgage rate. Ask about locking your rate when you are looking for a lender. It’s best to lock in your mortgage rate before closing.