Worried About Inflation? Consider Real Estate.

We don’t like to make predictions but we will say that, as an asset class, real estate looks well positioned for growth in 2022. This seems especially true in the residential single-family and multi-family space which is NavCap’s bread and butter.

Why do we feel this way?

First, as I’m sure you’ve noticed, inflation is on a tear. And with a war currently underway in Europe putting pressure on energy prices, inflation looks poised to escalate in 2022.

Historically, real estate has been a good inflation hedge. NCREIF estimates that during the high inflation period of the late 1970s and early 1980s, real estate generated total annual returns (income plus appreciation) of 17.8% from 1977 to 1981, while inflation over the same period averaged 10.7%.

What accounts for this phenomenon? Well, generally, inflation pushes the cost of everything up—even housing. To help offset the loss of purchasing power of the dollar, it’s possible for investors to use real estate to generate yield above the rate of inflation by 

• >locking in low long-term mortgage interest rates,
• >passing inflation to tenants by raising rents, and
• >profiting from the potential increase in home prices over the longer term.

Keeping an eye on rising interest rates and their impact on the cost of borrowing, a timely investment in real estate may make sense, especially as part of a diversified portfolio or investment strategy. It’s probably worth considering, at the very least.