Is Real Estate an Inflation Hedge?

You may have noticed lately that your expenses seem to be growing. It’s not just you! This is because America (and the world really) is currently experiencing a period of higher inflation than we have had in many years.

When it comes to inflation, you not only have to make sure that your paycheck keeps track with your increased living expenses, but also find out if your investments are beating inflation as well.

Historically, there are investments that have done well in inflationary environments like commodities, real estate and even TIPS bonds. In my opinion, real estate, and specifically residential real estate, is one of the best inflation hedges. Here’s why:

Rents keep track with inflation- unlike some types of commercial real estate, leases for residential real estate generally renew every year, allowing for renewals to keep pace with market rent. Housing is an essential, and even when prices go up, people are willing to pay, because they need a place to live.

Values keep track with inflation- over time, values generally increase when inflation does. Firstly, when rents increase, so does the value of the underlying real estate. Secondly, as inflation increases, so does the cost to build new real estate. If it is more costly to build real estate, existing real estate generally gets more valuable as well.

Leverage- if you choose to have a mortgage on real estate you own, the mortgage payment is many times fixed for the life of the loan. This means that the mortgage expense will stay the same while your rent will increase over time, allowing inflation to benefit the owner of leveraged real estate.

Although real estate isn’t guaranteed to do well in times of inflation, it usually has. Unlike other asset classes that do well in times of inflation, real estate also does well in low inflation environments as well. This makes real estate the perfect investment to buy in the face of higher inflation and hold for the long term.