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How Savvy Investors Can Navigate the Current Inflationary Period

While there is no doubt that the increasing inflation will have an impact on the real estate industry, real estate investors can still make solid investments through modifying their investment strategies.

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Over the course of the last two months, we have seen a noteworthy increase in both the consumer price index (CPI) along with the producer price index (PPI), which measure price changes in select goods and services. With the rise of consumer goods and services, we are starting to see heightened inflation concerns amongst real estate investors.

While there is no doubt that the increasing inflation will have an impact on the real estate industry, real estate investors can still make solid investments through modifying their investment strategies.

A Look Back

In the 1970s, inflation was running rampant, and it went relatively unchecked by the government. By the end of the decade, inflation had risen nearly 15 percent and did not subside until the mid-80s. Once prices started edging up, higher inflation rates proved to be very difficult to reduce and persisted long enough to impact investment trends.

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Fortunately, with the benefit of hindsight, we can suggest steps that real estate investors can take to lessen the impact of higher inflation on their investments. Many techniques that worked in the ’70s are still applicable today, should we be entering an extended inflationary period.

Shift Investments Into Assets With Income and Value That Can Keep Pace With Rising Prices

It is important to be aware of which sectors of real estate continue to thrive when we are experiencing extended periods of higher inflation. Typically, residential properties in strong economic areas that are going through a growth spurt are safer bets when inflation is on the rise. In contrast to commercial properties that typically have limits on annual rent increases built into their leases, rents for residential properties can be more readily adjusted to offset rising prices.

Stay Ahead of the Curve

As mentioned earlier, in the ’70s, government efforts had a limited impact on lowering inflation rates. Savvy investors who correctly anticipated that we were entering a period of sustained price increases tended to load up on fixed interest debt and complete contracts and purchases with fixed price terms.

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Use Fixed Rate Loans to Partially Finance Property Purchases

A fixed rate loan is a great tool during a time of rising inflation. This will allow investors to repay their loans with cheaper dollars. Right now, the Federal Reserve has made it clear that they intend to keep interest rates near their current levels for the next year or even 18 months, allowing the use of debt to help increase returns. Should higher inflation rates persist, expect a return to variable rate mortgages and other financing instruments and contracts that adjust terms to keep up with higher prices. 

Move Money Into Inflation-Protected, Near-Liquid Alternatives

As inflation creates quite a bit of uncertainty, investors typically allocate more of their net worth to more liquid assets, like cash or near-cash alternatives. Since cash will fall in value, investors might consider near-liquid assets like a Treasury Inflation-Protected Securities or moving cash into publicly traded stocks or ETFs that invest in concrete assets like precious metals that tend to keep up with inflation and that also provide liquidity in the possible event of needing cash quickly.

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A growing number of financial managers are supporting allocating a limited amount of cash into cryptocurrencies, which may hold and even increase in value but are overall much more unpredictable.

Lessons Learned

History has told us time and time again that politicians almost always prefer to cheapen the value of money over introducing new or higher taxes when confronted with the need to repay debt. With that in mind, real estate investors need to revisit their investment strategies if they conclude that rising prices will persist. While the value of our money may be decreasing, with the right strategies, assets and cash can be relatively protected. As with many investment strategies, timing is everything, and it all comes down to making the right moves before it’s too late.

Paul Getty is the CEO of First Guardian Group.

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