Building a Wall Against Inflation with Real Estate

This image shows the hand of a bricklayer placing a brick on a partially-built wall.

Recently I received a nice email from my local Realtor’s Association, thanking me for being a member for the past 8 years. They shared some stats that seemed so nice at the onset:

  1. The median sold price in my county in 2015 was $152,000. The current median sold price in my county is $281,000.
  2. The average interest rate for a 30-year fixed loan in 2015 was 3.85%. Today is it 7%.

These stats made it easy to see a striking fact: in only 8 years, the median price had almost doubled, rising 84%.

Let’s stop for a second. Think about that.

If you do not own real estate, the purchasing value of your dollar has shrunk significantly over that time.

Inflation Rates Since 2015

Since 2015, the U.S. has experienced varying inflation rates. The annual inflation rate, measured by the Consumer Price Index (CPI), has seen periods of acceleration and deceleration. In 2015, the inflation rate was relatively modest at around 0.12%. However, subsequent years witnessed fluctuations, with a notable increase to 2.44% in 2018. In the years that followed, the rate remained above 1%, reaching 2.33% in 2019 and then dropping to 1.23% in 2020. The rate for 2021 skyrocketed to 4.70% and 2022 increased even further to 8.00%.

If you do the math based on the above housing numbers, the average inflation on real estate has been 10.5% yearly over the past 8 years.

And yes, real estate will fluctuate up and down. Over time, however, it will rise in value to counteract inflation. During periods of heavy inflation, it will rise with inflation, protecting your dollars.

Just ask your Uncle Henry how much he paid for his first house back in 1970.

…Exactly.

Impact on Purchasing Power

Let’s talk investments.

In 2015, the average selling price for a Class B apartment complex in Central PA with 25 or more units was $60,000 per unit. In 2022, this has gone to $106,000, an increase of 76%.

While the cap rate is a more accurate reflection of the value of an investment property, cap rates will fluctuate relative to the lending and interest rate environment, which is evident right now. Over time the increase in rents drives up the NOI, which is then reflected in the price per unit metric.

Strategies for Mitigating the Impact

Different ways to buy real estate:

  1. REITs: Purchasing ownership in an REIT is as simple as buying stock. REIT are large entities that invest in large real estate, often specializing in certain property segments, like Healthcare or Industrial. While they can be a helpful balance of a good stock portfolio, an REIT behaves much more like a stock, as it is influenced by the market. Many of the benefits for real estate are not present, like tax sheltering and principal paydown.
  2. Syndications: Buying into a syndication is direct ownership of real estate, which should include the benefits of ownership including cash payouts, appreciation (including shelter from inflation!) principal paydown, and tax benefits. However, there is no control of the asset if you are a passive investor, and less diversification since these typically have $50,000-$100,000 minimums. Often, you must also be an accredited investor.
  3. Funds: While similar to a syndication, investing in a fund is almost a hybrid of REITs and syndications. Funds will take your investment and place it in multiple other syndications, which allow your investment to be more diverse, and have a more consistent payout. The investment in a fund is usually for a longer time period, to allow more diversification in their investments. It will include many of the benefits of direct ownership.
  4. Direct Purchases: Usually the first option people think of when investing in real estate, direct ownership is ideal for you if you are a Type-A person who needs to have control. Being able to decide how the property is managed means that your returns can often be increased as well as the property’s value over time. For the hands on investor, usually the best return can be found here for those who want to have an active role. All tax benefits, principal paydown, appreciation (shelter from inflation) and cash flow belong to you.

If you are comparing your stock return, it is important to compare it to the performance of real estate on an inflation adjusted metric.

Conclusion:

Real estate is not for everyone. But, like your relatives who say they don’t like pecan pie at Thanksgiving, I think this: Fine by me, more for the rest of us!

If you want to discuss investment real estate – how to diversify, buy more, reduce your headache, or whatever it may be – give us a call. We will discuss how you can shelter from inflation.

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