Last month, the U.S. reported an annual inflation rate of 8.3%. There are very few places in our lives high rates of inflation don’t impact. Our groceries cost more. So too does the gas we put in our cars and clothes we put on our backs.
Inflation even impacts our stock and retirement investments.
How? If over a decade, your portfolio averaged a rate of return of say 5.9% (which is what the S & P 500 averaged between 2009 and 2019), then the difference between that rate and inflation represents a loss. In other words, something is 8.3% more expensive, and you have to buy it with your original dollar plus 5.9%. That leaves you with a deficit.
There is, however, one investment that historically has proven to fare better than most others during inflation, and that’s income-generating real estate.
Mortgages stay the same. Unless you refinance or have a variable rate loan, the amount of money you borrowed from the bank doesn’t change, nor does the amount of your monthly payment.
You’re paying back your loan with dollars that are worth less. For example, let’s say you borrow $100 today. You promise to pay it back one year from now. Inflation stays at 8.3%. So next year, the $100 you’re repaying has 8.3% less buying power. It’s almost as if you’re getting a discount.
Rents keep pace with inflation. While the costs of utilities, maintenance and insurance also increase, they tend to do so in proportion to rent. Of course, if a local jurisdiction (like St Paul) caps annual rent increases at 3%, this ratio will not hold true, so it’s important to consider location when investing.
Property values keep pace with inflation too. People need housing, regardless of the economy. That’s true for both home buyers and tenants. While higher interest rates may slow the rate at which values go up, our current and foreseeable housing shortage will result in higher prices.
If you’re thinking of investing in real estate, give me a call. It can be a great way to create wealth, regardless of what the nation’s economic conditions may be.