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Hedge Inflation with Investment Property

Hedge Inflation with Investment Property

The cost of real estate tends to increase at a rate that falls very close to inflation rates. Studies that compare various types of assets with inflation rates indicate that real estate has the highest rate of correlation. Sources for documenting and examining these correlations include Moody’s Analytics, S&P, Barclay’s Captial, NCREIF and NARFIT.

Some of the variables affected by inflation and related to investment properties include:

  • Rental Rates: Both residential and commercial rents can increase during periods of inflation and many consider rental income as the best hedge against inflation. As a comparison, mortgage rates can often be fixed while rental income can rise.
  • Property Value: The increase in rental rates often increases the value of the property and neighborhood the property is located in.
  • Rental Demand: Homes are typically less affordable when inflation exists, which increases the number of renters searching for homes to lease. This means more demand for clean investment properties. However, an oversupply of product can make it difficult to increase rental rates and affect returns.
  • Financing Property Purchases: Financing is a double-edge sword for property investors. On the one hand, a fixed rate loan can enable the investor to pay off the property loan in real terms with less money than the original amount borrowed. However, higher interest rates increase the cost and difficulty of financing a property purchase.

Exchange to Increase Returns

There are several exchange scenarios to consider when inflation looms.

Exchange land that generates no income and acquire an income generating property such as an apartment or single family dwelling.

Exchange non-income producing property for multiple single family dwellings—rental rates are usually adjustable per year, according to inflation and economic indicators. Some investors prefer this investment to a triple net property—NNN properties do not provide income increases as easily as single family homes.

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Using a 1031 Real Estate Exchange