WHY INFLATION HAS INVESTORS TURNING TO MULTIFAMILY REAL ESTATE
INVEST IN INFLATION. IT’S THE ONLY THING GOING UP.
~WILL ROGERS
How true this quote is when you consider that Real Estate is one asset class that benefits from inflation.
As we manage through both domestic and world events, history and experience have taught us that being prepared for cycle corrections and short-term economic hiccups could be one of the most essential strategies you could employ to build your wealth in both good and bad times.
If you have prepared or are preparing to keep your money working for you, nice job. Too many people that sit on the sidelines with a significant position in cash could be experiencing death by a thousand cuts and here is why:
This is a simple but telling example of our current inflation rate at 8.5% for May 2022. A $100 bill over the past year is now worth $91.50, as reported by the U.S. Bureau of Labor Statics. Quite frankly, I believe the inflation rate is higher. If this continues at even half that rate, your cash is losing value at an alarming rate.
Personally, I believe that sitting on all cash or investments, that, at a minimum have not proven to keep pace with inflation could be a roll of the dice. If you understand how inflation can be an opportunity and you have access to assets that fare well in inflationary times, be prepared to capitalize on the opportunity.
MULTIFAMILY TOPS THE LIST FOR INVESTORS
It is no secret that I have some bias toward Real Estate. I have seen first-hand its power over the past 20 years to overcome several punches to the nose and come back stronger. Real Estate is a hard asset and is extremely resilient. This is even more so for Multifamily Real Estate. Other assets can also perform well such as Treasury Inflation-Protected Securities (TIPS) and Commodities. However, if you read any recent articles from industry experts about where the smart money is moving, Real Estate is on top of that list.
DEMAND FOR MULTIFAMILY
Multifamily Real Estate historically performs well in an inflationary period. Economic growth fuels employment and higher wages, which in turn drives demand for housing. This environment allows multifamily owners to raise rental rates that will offset higher construction, labor, insurance, taxes, and other costs, theoretically allowing multifamily properties to hedge the effects of inflation and prosper over time.
INFLATION HEDGE
Compared with other investments such as stocks and bonds, Real Estate is a physical asset that has intrinsic value and is an excellent inflation hedge. In addition, Multifamily Real Estate investments can provide cash flow, appreciation, depreciation, and mortgage reduction paid by the tenants. These are unique characteristics of this asset class, and at the same time, the housing market faces a chronic shortage of some 5 million units.
To further highlight the continued demand for housing, first-time homebuyers are seeing an average monthly mortgage increase of $500-$700 per month due to the recent rise in interest rates over the past year. This alone will keep tens of thousands of millennials in the apartment market for the foreseeable future.
FIXED DEBT
Another key driver to why Real Estate is an excellent hedge for inflation is fixed debt. While rents are typically adjusted every year when tenants renew a lease or there is a turn on that unit with a new tenant, this allows for annual rent increases. Along with higher demand, these two characteristics have traditionally kept pace with the inflation rates. When you add to the mix that your debt payments could be fixed for 10 years or longer, the probability is high that investors can expect to benefit greatly from fixed debt as rents and property values rise.
PROVEN SPONSOR
Finally, know your sponsor and the deal. Favorable fundamentals in certain growth markets have created an attractive multifamily rental investment landscape. While multifamily investments can typically lessen the negative effects that inflation has on purchasing power, conditions that appear promising are not always immune to tough times.
We are fortunate to call Texas our home. We continue to be a national leader in job creation, employment, and population growth. However, just as challenging deals can occur in great locations and good times, Sponsors that have the foresight and experience to underwrite for potential changes can execute good deals in challenging times.