Financial advisors tell you the secret to financial success is investing early and often. As a rule of thumb, setting aside 10% or more of every paycheck throughout your career will lead to a stable retirement if you begin early and contribute consistently. This strategy generally works as long as the market beats inflation.
Over the last decade, inflation has hovered at or below 2% (averaging 1.8%), with the S&P 500 producing an average return of 14.8%. The perfect conditions for a buy-and-hold stock market investment strategy.
Then in 2021, hyperinflation caused prices to rise by 7%, and this year, as of August 2022, it is sitting at 8.3%. Add a down market in 2022, with losses averaging -17.02% as of August, and many investors are looking for inflation protection. Finding alternatives could be vital if these conditions are the beginning of a recession that could rival the Great Recession of 2007-2009.
As with any economic condition, there are winners and losers when inflation rises rapidly.
The Losers During Inflationary Times
- Retirees who live on a fixed income.
- Workers who do not receive enough wage increases to account for rising prices.
- Savers with large balances in savings or money market accounts.
- Consumers with variable interest rate debt or credit card balances.
- The economy as a whole.
The Winners of Inflationary Times
- Consumers with fixed-rate debt.
- Businesses with the ability to reduce expenses to offset the higher cost of goods and wages.
- Companies specializing in essential consumer goods and services.
- Proprietors with physical assets.
- Owners of real estate.
Inflation and Real Estate Property Values
Inflation is not synonymous with appreciation. The inflation rate is directly tied to currency as it relates to the cost of goods and services. On the other hand, appreciation is an increase in value based on demand. The question during inflationary times is will the value of the property appreciates more or less than the rate of inflation.
In 2022, multifamily housing units appreciated by over 10%, well ahead of the stock market and above the rate of inflation.
Inflation and Mortgage Rates
Inflation increases the cost of goods and services. In response, the Federal Reserve raises rates to slow spending. Today, prices are rising at record levels, and the Fed nearly doubling interest rates in the course of five months has barely moved the needle.
These interest rate increases drove mortgage rates from below 3% to around 6% by September 2022. While inflation negatively impacts the cost of debt, investors can lock in the rate to protect against future increases. Then if interest rates fall, property owners can refinance to reduce borrowing costs.
Inflation and Rent Rates
Even though rising interest rates lead to higher borrowing costs, commercial real estate investments tend to pass higher costs to tenants in the form of increased rents. In the top 5 metro areas, rents in 2022 increased by 13.4%, reflecting the higher cost of owning and managing multifamily properties.
Real estate investments tend to provide a hedge against inflation because owners can pass higher costs to tenants. Multifamily complexes become particularly valuable because housing is insulated from economic conditions because it is an essential need.
If you are interested in learning more about investing in multifamily commercial real estate syndications, we created a short introductory video.