Inflation– a term that often sends shivers down the spine of investors and savers alike.
As the cost of goods and services rises, the value of cash diminishes, and purchasing power over time. During periods of economic uncertainty and rising inflation, savvy investors look for assets that not only retain value but also grow in worth.
We compared real estate to other popular forms of investments:
| Stocks | Stocks can provide long-term growth, they’re often subject to significant volatility during inflationary periodsInflation can also eat into corporate profits, reducing the value of shares |
| Bonds | Fixed-income returns lose value as inflation rises, making them a less attractive option for preserving purchasing power |
| Gold | While it can retain value, it doesn’t generate income |
As you can see real estate stands on top as one of the best hedges against inflation. But let’s discuss what about real estate that allows some sort of protection from the effects of inflation.
Here’s why:
It’s a tangible asset with intrinsic value.
Real estate is a physical, tangible asset—a characteristic that sets it apart from many other investments. Unlike paper assets like stocks or bonds, real estate provides utility, whether as a place to live, work, or operate a business. This intrinsic value ensures that demand for real estate persists, even during inflationary periods.
Its value tends to rise with inflation.
Historically, property values have shown a tendency to rise with or even outpace inflation. As the cost of materials, labor, and land increases, so does the replacement cost of properties. This pushes up home prices and market values, benefiting property owners.
Rental income adjusts for inflation.
For investors who own rental properties, inflation often leads to higher rental income. As the cost of living rises, landlords can adjust rents to keep pace with inflation. This provides a steady, inflation-resistant income stream. Unlike fixed-income investments, which may lose purchasing power during inflation, rental properties offer an adaptable income source.
The ability to leverage and fixed-rate mortgages.
One of the most powerful aspects of investing in real estate is the ability to leverage your investment through a mortgage. During inflation, the value of the debt remains fixed while the property value and rental income rise. This dynamic allows real estate investors to build wealth while effectively paying off their debt with “cheaper” dollars over time.
It allows diversification from volatile markets.
In times of economic uncertainty, stock markets can experience significant volatility, leaving investors exposed to sudden losses. Real estate, on the other hand, tends to be less volatile. While property values may fluctuate over time, the market is generally more stable, especially when properties are held for the long term.
It has tax advantages.
Real estate offers several tax benefits that can further enhance its appeal during inflationary times. Property owners can deduct mortgage interest, property taxes, and depreciation, reducing their taxable income. Additionally, when properties appreciate in value, investors can defer taxes through strategies like a 1031 exchange or by holding onto the property until it’s passed down to heirs.
There is a limited supply and a growing demand.
Real estate benefits from the economic principle of supply and demand. We cannot create any more land, but the demand for housing and commercial space continues to rise. This imbalance further supports the value of real estate investments, especially during periods when inflation diminishes the value of other assets.
It’s a long-term wealth builder.
Real estate isn’t just a hedge against inflation; it’s a proven tool for building long-term wealth. Over decades, property values tend to appreciate, providing both income and equity growth. For investors seeking stability and a hedge against economic uncertainty, real estate offers a reliable and resilient option.
Whether you’re a seasoned investor or a first-time buyer, investing in real estate can help you preserve and grow your wealth, even in the face of rising prices.
Are you ready to start your real estate journey?
Contact an RH Agent to explore investment opportunities that can safeguard your financial future.
