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Why Multifamily Investors Don't Fear Inflation
What Rising Inflation Means for your Multifamily Investments
Many of the smart folks who invest always look to diversify their portfolios with investments that are able to withstand the effects of inflation. While the stock market may be Hollywood’s favorite way to characterize investing, the truth is that both commercial and residential real estate are oftentimes more solid acquisitions to make, with multifamily offering slightly more peace of mind than your typical residential plot. This is particularly true in regards to periods of increased inflation.
So are you multifamily investors ready for the good news? Historically speaking, periods of inflation are actually a good thing for multifamily investors. Since multifamily properties are tangible assets, the value of a property is determined by its condition, improvements, and rental potential, all of which are untethered to the charts of ups and downs that plague any stock or bond.
More importantly, while almost any good or service can be willingly given up in times of economic distress, people will always need to have a place to live. This allows multifamily properties to not only stay afloat in even the worst of times but actually remain profitable. A property can see income returns from rent payments, parking, and other fees associated with the property, all in conjunction with a possible appreciation of value.
And then there is the actual effect that inflation has on the multifamily market, which you may find surprising. With an economy suffering from rising inflation, the hiked-up prices of goods and services typically tend to cause the prices of homes to rise as well. We’ve already made mention of the simple fact that people will still need a place to live, and if the increased costs put purchasing a home out of reach for consumers, then the multifamily market sees an increase in rental demand.
As counterintuitive to an inflated economy as it sounds, higher rental demand also means that the asking rate for rent also increases. This is the key to multifamily investments being a hedge against inflation. The increased rent ask serves to offset the increased operating costs and expenses, thus padding the investor against loss. Additionally, increased rental rates sometimes lead to increased value of the asset itself, further increasing financial security during such a volatile period.
While we hope you don’t get too eager for inflation to rise, it’s definitely not something to stress if you have the right multifamily investments in your portfolio. As morally bankrupt as it may sound, an economy with increased inflation seems to only benefit the savvy multifamily investor through secure income sourcing, increased demand, and the ability to raise rent prices to exceed the increase in expenses. Not to mention that a decent portion of apartment financing utilizes fixed-rate loan structures that keep payments predictable and unaffected by the state of the market. The multifamily market space is truly one of the strongest pillars of the United States economy for a reason.