What’s Up With Inflation and How it Affects Real Estate Syndication?
Chances are you’ve heard the term inflation floating around a lot lately, and maybe it’s influencing how you think about investing this year.
It can be intimidating when interest rates fluctuate and you’re trying to set up a real estate syndication deal. However, we want to encourage you to continue with your real estate syndication investment because inflation is actually on your side. In this article, we’ll explain how inflation works and how it can affect the value of your investment.
Inflation is just what it sounds like: just like a balloon, when it inflates, prices can grow (or inflate). In other words, inflation is the rate at which prices of goods and services in an economy, such as the U.S. economy, rise in a specific time period. For investors, this can be positive or negative.
Really, inflation is neither good nor bad. It just depends on your perspective. For starters, inflation means that the value of money goes down as prices rise. So what you could buy with $10.00 now costs $20.00 (as an example).
So when people talk about inflation, they tend to frame it in a negative context. Your money’s purchasing power goes down, meaning if you’re in the market for buying, you have less power than before. Holding onto cash during periods of high inflation is NOT a smart choice because your money isn’t working for you. It’s holding you back.
There is a good side to inflation, though! If your money is invested in increasing value assets, you’ll come out ahead. The value of your holdings goes up with inflation.
Who Manages Inflation?
But how is inflation managed or controlled? There are a few key players. The major factors are supply and demand. For example, when people drive less and the oil supply is higher, you’ll see much lower gas prices at the pump. On the flip side, you will likely see higher gas prices when producers hold back on releasing their oil and gas products.
The government can also affect inflation rates based on how much money they print. Additionally, government regulation can lower interest rates, which might cause more inflation, or increase interest rates, which can basically pump the brakes on inflation.
To track inflation, the United States government uses the Consumer Price Index, which is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. As you consider how you will manage your real estate syndication investment, check the CPI, and forecast inflation to understand the right time to get into or out of the market.
What Inflation Means for Real Estate
The inflation rate can directly influence the value of real estate investments as it affects the cost of living, wages, and mortgage rates. When inflation is high, wages may rise, which can help people afford more expensive properties. However, when inflation is low, real estate prices may become less attractive for investors who are looking to make a return on their investment.
This means it’s important to keep an eye on the inflation rate to determine whether real estate investments are likely profitable. So if you’re considering investing in the real estate market, stay up-to-date on inflation and its influence on property prices!
Taking Advantage of Property Appreciation
Inflation and appreciation are NOT THE SAME THING. An appreciation rate, such as in the case of real estate, relates to the amount a property's value increases over time. When a property's value appreciates, it increases in response to market demand, not the power of the dollar.
Higher interest rates, coupled with pandemic-fueled price increases, have caused affordability issues in some of the high-flying markets around the country, but prices have begun to fall in markets nationwide as many would-be homebuyers find they can't afford the higher monthly payments dictated by rising interest rates.
Simply put, inflation tends to drive real estate prices up. This is true for all real estate types, including single-family homes, multi-family homes, commercial properties, etc. It also drives rent prices up.
Property appreciation and rent hikes are great if you invest in real estate. This is because investors can simply watch as the value of their real estate investments increases as rent increases. In fact, rising real estate prices caused by inflation is one of the primary benefits of being a real estate investor.
But be warned. Because real estate prices tend to increase and keep pace with inflation, many people use real estate as a way to hedge against inflation. When inflation occurs, the purchasing power of each individual dollar decreases, meaning each dollar can buy fewer and fewer things. So for people who keep most of their wealth in cash, inflation can be a severe problem.
For people who invest in hard assets like real estate, inflation can help them build wealth or at the very least, preserve purchasing power and protect themselves financially during inflationary periods.
This blog post is intended to provide general information and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship with Premier Law Group.
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