Due to inflation, many goods and services increase in price, making it difficult for some consumers to get what they need. Even investors and landlords are affected by the rates of inflation. Additionally, the housing supply and demand are part of the inflation impact on real estate. If you’re wondering about inflation and its effects on real estate, just keep reading. This blog will go over everything you need to know about how landlords can navigate inflation.
What is Inflation?
Inflation is the rate at which the cost of a good or service increases over a period of time, typically calculated by year. While prices can differ depending on the situation, inflation is the cause of an increase in the supply of money. That said, inflation commonly occurs due to the actions taken by the Federal Reserve.
Overall, when more money becomes available, the purchasing power of a dollar decreases, which in turn increases the price of goods and services. Unfortunately, inflation affects most products and services, including real estate. Next, let’s go over some of these causes and effects.
What Causes Inflation?
While the increase in money supply ultimately causes inflation, there are a few ways the money supply increase can affect consumers.
For example, in a demand-pull effect, an increase in the supply of money creates an increased overall demand for goods and services. In other words, when you have more money available, it leads to higher spending and increased demand for products.
Another cause of inflation can be the more expensive production process of goods and services. When a product is more costly to make, it causes the product’s price to increase as well.
How Does Inflation Affect Real Estate?
Inflation impacts real estate in several ways. For example, building a home increases significantly because of rising wages and more expensive supplies and materials. Investors have had a hard time finding reasonably priced rental homes and expanding rental businesses.
When inflation causes interest rates to rise, money becomes more expensive to borrow from the bank. In turn, this can cause fewer investors to finance or purchase rental homes at all. However, the increase in rental home demand has allowed current landlords to raise rental prices, which has created an affordable housing crisis.
That said, there are ways for investors to invest during high times of inflation. After all, investing in real estate is extremely dependent on the housing market and the property location. So, let’s go over some tips for landlords when it comes to the inflation impact on real estate.
How to Invest During High Times of Inflation
When inflation rates are high, like they are currently in the United States, it can be hard to decide what investments will be worth it. Although mortgage rates are high also, investing in rental properties can pose many opportunities. For example, the demand is higher now than usual, so there’s less chance of extended vacancies.
Additionally, landlords can set rental rates according to their property location, extra amenities, and rate of inflation, so they don’t miss out on profits. All in all, rental properties tend to do pretty well during periods of inflation since they can increase in value.
Can Real Estate Protect Against Inflation?
Yes, in some cases, real estate can be used as a hedge against inflation. For example, landlords can charge more for their properties during periods of high inflation while paying the same mortgage payment. In turn, this ends up allowing landlords to earn more profit while others are paying higher housing costs.
Additionally, housing prices typically increase over time so that investors can take advantage of this inflation impact on real estate. Let’s go into some other ways real estate can protect against inflation.
- 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.
- 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.
- 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.
Is Now a Good Time to Invest in Real Estate?
Investing in real estate at the right time is crucial for a successful rental business. Over the past couple of years, we’ve experienced steadily increasing home prices and a low supply of homes available to purchase. Should investors purchase real estate now before prices rise even more?
People are always looking for housing. However, current first-time homebuyers are experiencing a difficult choice between renting vs. buying a home. Unfortunately, many homebuyers are being priced out or losing to the competition with an inflated market. As a result, the rental market is extremely strong right now, with low vacancies and high rental rates.
It’s hard to say what the housing market will look like throughout 2022 and beyond, but many predict increased demand and even higher home prices. That said, purchasing real estate now can give landlords more opportunities in the future.
How Can Investors Prepare to Purchase Real Estate?
If you’re an investor and eager to purchase more rental properties this year, there are a few things to consider. First, it’s essential to keep up with market trends and use helpful financial strategies. So let’s go over a few things to do before you invest this year.
Take a Look at Your Finances
Before you think about buying a rental property, it’s crucial to step back and look at your finances first. Buying a property is a huge purchase, so you need to fully understand what you can afford and what you need to save.
It’s easy to run into financing issues if you don’t plan your investments out accordingly. Luckily, if you own rentals in Pennsylvania, your local Philadelphia property management company can send you financial reports for your rental properties.
Consider BRRRR Financing
BRRRR (Buy, Remodel, Rent, Refinance, Repeat) financing can give investors an opportunity to build a solid rental portfolio. Although it takes some time and work, BRRRR financing is a great way to earn income while expanding your rental business.
Buy When You Feel Ready
Finally, it’s important to make large investments when you’re ready. If you’re not in the position to make a real estate purchase, then don’t let anyone pressure you. Instead, wait until you can develop a solid investment plan and feel confident about your purchase.
Get the Most Out of Your Investment With Property Management
Navigating the inflation impact on real estate can be challenging for investors and property owners. Understanding the market and deciding when to buy, all while running a rental business, can be difficult for investors to handle alone. Luckily, your local property management group is qualified and eager to help you out.
Whether you own one property or 100, Bay Property Management Group has your rental services covered. We help with tenant screening, rent collection, eviction services, and more. Contact Bay Property Management Group today if you are looking for management services in Baltimore, Philadelphia, Northern Virginia, Washington DC, and other surrounding counties.