Mada Partners

Mada Partners > Blog > Is Real Estate a Good Hedge Against Inflation?
Hedge Against Inflation

The news these days is replete with bad news.  From an economic and investors’ perspective, perhaps the somewhat dramatic rise in inflation rates is the most troubling.  Low inflation is not typically problematic.  In fact, most economists believe some lower levels of inflation are good for boosting the economy.  Higher rates of inflation, especially longer-term, is more challenging as it effectively erodes the purchasing power of your savings.

So, most investors are actively looking for ways to protect their savings/investments against the eroding effect of inflation.  We have written recently, about the power of real estate as a hedge against inflationary pressures.  However, given most people’s growing concerns and anxiety about inflation, we thought we’d talk a little more about the role of cash flowing assets and multi-family real estate as strong arrows in your investing portfolio.

Owning Cash Flowing Assets During Inflation

The best way to protect your portfolio from the effects of inflation is to own cash flowing assets. What exactly does this mean?

Cash Flowing Assets: Are assets that produce income, or the ability to produce income.

Cash flow is basically the difference between how much money comes in and how much goes out of your bank account. You can get an estimate of your cash flow by looking at a pro forma

How does this work? Let’s say you purchased a rental property for $300,000 and it generated $10,000 in rent each year on top of covering all expenses (including mortgage payments). Now let’s say that rent increases by 5% per year due to inflation and suddenly rents increase by $1,500 per year ($300K x 5% = $15K). If you were making $10K per year before then now you’re making $11K per year ($10K + $1K = $11K). So how do we protect our investment against inflation? By buying more properties!

Focus on 80% in cash flowing assets.

The reason why 80 percent of your investable net worth should be in cash flowing assets is because it protects you from any unforeseen circumstances that may arise during the life of your portfolio.

For example, if one or more of your tenants moves out unexpectedly or stops paying rent, this will affect your monthly cash flow. In this case, having a large portion of your wealth invested in cash flowing assets allows you to cover the gap until you find a new tenant and fill the vacancy.

How Does Multifamily Perform During Inflation?

Multifamily properties are a very good investment during inflation because of their high cash flow, low risk and ability to adapt to changing markets. Inflation is one of the most important factors for real estate investors to consider when looking at the long term prospects of their investment.

Multifamily real estate is often touted as a hedge against inflation because of its long-term nature and relatively low correlation to other assets such as stocks and bonds. However, there are some important differences between multifamily property performance during inflation compared to other assets:

Multifamily rental rates tend to stay flat or decline over time due to supply and demand pressures in the market. The result is that even if inflation kicks in, owners of multifamily properties may not see their profits decrease much. This makes them more resilient during periods of high inflation than other assets like stocks and bonds which may see their value drop significantly during periods of high inflation.

Final Thought

Yes, Real estate is a good hedge against inflation. Local real estate will generally rise with inflation, and equity built in the house can be used as a source of liquidity in case of emergency.

To learn more about our real estate investing activities and how you might partner with us, click on this link to set up an exploration meeting with one of our partners.

Click Here:

Leave a Reply