For high-wealth investors, income from owning property has long been a proven strategy to beat inflation.
Property can weather the ups and downs of economic cycles- if you can wait.
Associated costs can be passed on to renters, plus, higher mortgage rates encourage renters, and property values can often outpace inflation.
Let’s discover today how to achieve the long gain by playing the long game in property investment, and how to profit from the current high inflation.
The Basics of Inflation
In economics, inflation is a quantitative measure tracking the rate of change in prices of a standardized basket of goods. Inflation is defined as an increase in prices over time, and the rate of that increase is expressed as a percentage.
How Inflation Affects Asset Values
Inflation is most damaging to the value of fixed-rate debt securities because it devalues interest rate payments as well repayments of principal. Longer-term fixed-rate debt is more vulnerable to inflation than short-term debt, because the effect of inflation on the value of future repayments is correspondingly greater, and compounds over time.
The assets that fare best under inflation are those assured of bringing in more cash or rising in value as inflation increases. Examples would include a rental property subject to periodic increases in rent or an energy pipeline charging rates tied to inflation.
Causes of Inflation in 2022
Supply chain disruptions including oil
Fed (Over) Spending
Higher Fed Rate
Property as a hedge against rising interest rates
Increase in Property Value
Property values increase over time- Historically, property values tend to increase over time. So, your property now may be worth more in the future despite inflation.
Property owners can earn more money– Investors that own several rental properties can take advantage of short-term lease agreements by raising costs. For example, when you raise your monthly rent amount but keep your mortgage payment the same, you’re getting more money in your pocket.
De-evaluation of Debts
The effect of inflation on debt- When home prices increase, it lowers the loan-to-value of property mortgage debt. In other words, the rental property equity goes up, but your mortgage payments remain the same.
Timing in Economic Cycles (higher inflation/ mortgage rates)
Rising mortgage rates de-incentivize renters from buying
Property assets can outpace inflation
Property assets typically outpace stocks
To be clear, property owners greatly differ from real estate investors, and not all property owners are real estate investors.
We are addressing the high-wealth investors like you who can afford to invest with substantial capital into a range of property types investments, as well as those of you who are looking to start using the property as an investment hedge.
What we learned today was that profit from property comes in 2 main ways, rental income, and property appreciation. Interestingly, and of benefit to investors like you, these income sources are favorably tied to inflation and rising mortgage rates.