Why Is Real Estate Considered a Strong Hedge Against Inflation?
Real estate is a solid inflation hedge for a lot of reasons. With limited housing supply plus ongoing demand, property values often climb with inflation. As living costs rise, rental income potential also grows – a rising tide lifting cash flow.
In addition, the inherent value of tangible land and buildings holds strong amid shifting prices. Furthermore, real estate moves with the economy’s growth. It provides steady rental income even when other assets falter. You can raise rents to match inflation.
Moreover, the limited availability of land drives prices up. Not only that, mortgages allow controlling assets with little money down. Also, different property types react uniquely to inflation; it sticks around for the long term, unlike stocks (some stocks are no longer trading), and real estate retains value even when currencies crash.
If you’re new to the idea of land investing, check out this case study of a land investor who reached financial independence in just 18 months.
What to Look for When Getting Into Real Estate Investments
Aside from the property’s location and your budget, there are some more factors to consider.
Investment Purpose
Clearly defining the purpose of a real estate investment upfront is critical to avoid unintended consequences later, especially if using debt financing. The main options are: buy to self-use to save on rent; buy to lease for income and appreciation but be prepared for landlord duties; buy to sell in the short-term for quick profits on property flips, or buy for long-term holds banking on substantial appreciation over time to meet goals like retirement.
Location of the property
No one can argue that “location” is one of the most important factors when investing in real estate. Properties closer to hubs like markets, bus stations, amenities, and such are more desirable, which means they can fetch higher prices.
Aside from the nearby hubs, it’s best to consider the future developments of the area. It may have a relaxed and peaceful environment now, but it might get very noisy and annoying when big manufacturing facilities start developing.
One way to figure this out is to contact the public agencies in charge of the area’s urban planning; this will give you a good view of future development.
Property Value
Many important factors depend on property valuation, such as listing price, investment analysis, insurance, taxes, etc. This means pinpointing the property’s value can save you a lot of headaches in the future. But how are you going to do it?
There are few appraisal techniques available. One technique that provides accurate valuation is the “Sales Comparison.” This involves looking at recent sales similar to the property, though you’ll need to adjust for factors like square footage, age, and renovations. If you want a faster option, appraisers can help you estimate what a buyer should pay.
Your Credit Score
Improving your credit score can pay off when it comes time to get a mortgage. The higher your score, the better the terms you’ll likely get from lenders. This also means you can save a lot of cash over the years.
So, if your score isn’t above 800 (considered excellent), it may be worth improving. Pay all bills on time, lower credit card balances to below 30% of the limit, avoid closing old accounts and applying for new credit cards, and check your credit report for errors will all help increase your credit score.
Your Expected Real Estate Income
You want to keep an eye on that cash flow for your investment property– that’s how much money you have left after covering expenses.
Some of the ways are:
1. Project your rental income by factoring in inflation, which tends to push rents up over time.
2. Estimate how much the property value itself will appreciate long-term.
3. Factor in tax savings from depreciation and other benefits.
4. Consider if renovations could boost your sale price down the road.
5. Compare taking out a mortgage vs just waiting for appreciation.
Be Careful with Loans
Loans make things easy now but can cost you later. Long-term interest racks up. Make sure you avoid getting over-leveraged. Even real estate pros struggle when markets drop. Shop around for the best rates and terms that fit your situation. Adjustable rates can help when interest rates fall, but will hurt when rates rise. Stay aware of hidden fees, too.
An Old or A New Building
New builds let you customize but may face delays and hidden neighborhood risks. Existing properties offer quick access and potentially lower costs. Check the builder’s reputation with new investments. Review deeds and surveys when buying existing. Monthly fees like taxes and dues can be a hit to your cash flow, so compare carefully. You may also want to review the types of real estate investments.
Real Estate Market
Like investing, buying low, and selling high in fluctuating real estate markets is essential to any exit plan. Watch for mortgage rate deals to lower financing costs. Follow key indicators like prices, sales, new construction, inventory, flipping, and foreclosures. Know the trends in your specific market niche, too. Timing matters to maximize real returns.