With the annual inflation rate as of May 2022 hovering around 8.6%, the U.S. dollar simply doesn't have the same buying power that it once did.¹ While cutting back on non-essential purchases can help you negate the impact of rising costs, you need a way to preserve your wealth.
Smart real estate investing strategies using short-term rentals and long-term rentals may provide you and your family with the hedge against inflation you need to not just survive, but thrive, during these challenging times.
In this guide you'll learn how inflation impacts your financial health. You'll also discover why real estate has long served as a safe haven for investors who want to protect their assets.
What Exactly is Inflation?
Simply put, inflation is the widespread increase in the cost of goods and services.
When the inflation rate rises, purchasing power decreases. This means that it takes more money to purchase the exact same products and services than it did previously.
Why is Inflation Suddenly An Issue?
The annual inflation rate in the U.S. is at the highest it's been in 40 years.¹ The last time we saw inflation rise this rapidly, Ronald Regan was in the White House, Michael Jackson's "Thriller" topped the charts, and Disney World opened the gates of EPCOT.
While opinions vary, the record-high interest rates in the early 1980's were attributed to:
- Skyrocketing oil prices fueled by the Iran-Iraq War
- Government overspending
- Increasing wages
Economists point out the similarities between the factors that drove high interest rates in the 1980's and the conditions that exist today. After all, we now have Russia's invasion of Ukraine, massive government debt due to the COVID-19 pandemic, and labor shortages pushing up wages.
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How Do Current Inflation Rates Impact Me?
In general terms, the 8.6% annual inflation rate is like taking a 8.6% cut in your hourly wages or salary. Overall, you're now only able to buy 91.4% of the goods and services with the money you earn in comparison to what you could afford a year ago.
While that's a bit of an over-simplification, it gives you an idea of what inflation does to your buying power.
Here are some real-world examples of what you may have already noticed:
- You're spending the same, but bringing home less.
Even if you're not much of a shopper, you've inevidibly noticed a big difference on your grocery bill. You're buying the same items every week, but the prices keep going up.
- Your mortgage, car loan and credit card rates are up.
The Federal Reserve is likely to increase the federal funds rate again in 2022 — that's the target interest rate the Feds suggest commercial banks use when borrowing and lending money to one another outside of regular business hours.
When the federal funds rate rises, so do the rates on consumer lending products. That means you'll be paying more in interest on everything from your auto loans to your monthy mortgage.³
- Your standard of living is slipping.
If it feels like you're struggling to keep up the same standard of living you once enjoyed, even though you're working just as hard as always, it's because your wages simply aren't keeping up with the Consumer Price Index, or CPI. That's the standardized measure of inflation which impacts everything from essentials like groceries to discretionary, lifestyle purchases such as vacations.4
- Your savings aren't what they used to be.
Even if you've managed to aquire a sizable balance in your bank account, at a national average interest rate of 0.06%, your savings aren't earning enough interest to keep up with today's inflation rates. If you're retired, semi-retired or plan to soon, the reduced value of your savings account could be having a big impact on your retirement plans.³
Cash is no longer king.
Keeping a stash of cash under the mattress may have helped your grandparents weather high inflation, but cash doesn't earn any interest at all. Your greenbacks are shrinking in value, and today's bankroll may well be little more than pocket change in the near future.
So now what?
Knowing that increases in your day-to-day cost of living are outpacing your income and savings at breakneck speed can feel overwhelming. Thankfully, there are some simple steps you can take to preserve your wealth, hedge against inflation and even thrive when inflation rates are high.
Real Estate Investing vs. Traditional Investment Vehicles
If you're in the position to invest right now, finding a way to make your money work for you can be tough. Traditional investment vehicles aren't immune from the volatility and low returns that are the trademarks of every recessionary period.
On the other hand, real estate investing in your own home, or in a property used for either short-term rentals or long-term rentals, has a number of advantages over many of the alternatives.
Here's a few points to consider about investing right now:
- Stock markets are extremely volitile when inflation is high.
For example, investing in the stock market has spurred plenty of success stories, but stocks are notoriously volatile when inflation rates are high.5 Not only can this mean you may not realize the gains you're looking for, but you run the risk of losing money on your investment.
- Inflation-indexed bonds are low risk, but deliver low returns.
Another investment option that's popular among financial advisors are treasury inflation-protected securities, TIPS. Issued by the U.S. government, these low-risk, low-return bonds are indexed to the inflation rate. While TIPS are generally considered to be a relatively 'safe bet', they also deliver less-than-impressive rates of return.7
- Commodities simply don't stand the test of time.
In theory, tangible assets traded on the global scale should rise in value in lockstep with inflation. Unfortunately, history shows that commodities such as oil, minerals and cereal crops haven't matched inflation rates during recessionary periods in 50 years.6
- Real estate investing often outpaces inflation.
The quote, "Buy land, they're not making it anymore." is often attributed to the great American humorist and writer, Mark Twain. While writers aren't usually the best source of financial advice, in this case, Mr. Twain was right.
Regardless of the financial climate, real estate prices across all markets tend to match inflation rates.8 In many cases, real estate is one of the few investments to deliver returns that not only keep up with high inflation rates, but provide a tidy profit to investors.
Real Estate Demand Is Up
Given it's reliability as an investment, and it's long-standing track record of preformance during recessionary periods, it's no coincidence that real estate demand is outpacing supply in many markets.9
Look at what happened between 2020 and 2021: home prices nationwide jumped by nearly 17%, and inflation rates were 7% during the same time frame. The net result? Not only did real estate investors keep pace with inflation — they beat it by 10%.10
Three Basic Types of Real Estate Investments for New Investors
There's a number of ways to invest in real estate, but we like to stick to the three fundamentals:
- home ownership (your primary residence)
- traditional long-term residential rentals
- and short-term, or vacation, rentals.
Hedging Against Inflation Starts at Home
If you're already a homeowner, you likely already know that you're well on your way towards financial independence. The value of your home is likely to rise, and you've shielded your family against rising home rental rates.
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Now's a great time to commit to becoming a homeowner. Our team can help you acheive homeownership using proven strategies matched to your needs and budget.
Grow Your Real Estate Investment Portfolio With Long-Term and Short-Term Rentals
- Investing in Long-Term Rentals
Regardless of economic conditions, everyone needs a place to live - that makes long-term rentals a good option when you're looking to grow your wealth, even during a recession.
Owning a long-term rental can be the catalyst your family needs to truly thrive, but there's also a lot to consider. Our real estate investment experts can help you navigate your options, create a plan that works for you, and help you discover opportunities in your local market.
- Investing in Short-Term Rentals
Short-term rental platforms such as Airbnb and VRBO have transformed the short-term rental space, opening up tremendous financial opportunities for individuals and families worldwide.
A well-managed short-term rental can deliver a return on investment, ROI, that exceeds what you may be able to acheive with a long-term rental, but it's important to realize that running a vacation rental involves a significant amount of daily hands-on work.
If you're willing to put in that work, a short-term rental can be a lucrative investment that can see you through even double-digit inflation rates.
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To learn more about how you can hedge against today's record inflation rates by investing in your own home or in either short-term rentals or long-term rentals, drop us a line today. We're the experts when it comes to real estate investing, and our team is here to help you meet your financial goals.
The above references an opinion and is for informational purposes only. It is not intended to be financial advice. Consult the appropriate professionals for advice regarding your individual needs.