Commercial Real Estate As A Hedge Against Inflation

Inflation, inflation, inflation. There seems to be a lot of doom and gloom out there as it pertains to inflation. So here’s the good news — this is an opportune time to point out the different ways real estate can help you benefit during times of inflation –  especially if you take advantage of investing in real estate before the federal reserve starts initiating higher interest rates.

Inflation is creating tailwinds for investors who are looking to allocate their portfolios and create a hedge against inflation with passive investing in real assets – particularly in commercial real estate syndications.

Inflation is essentially the devaluation of your money, which means that a dollar today will buy you less than it previously bought you. Simply put – your dollar is buying you less, so you have to spend more for the same goods and services.

The projections are varied as to whether this inflationary period is a short-term issue simply due to anemic supply chains and the re-opening of the economy or whether a more long term inflationary period is at play here.

You’ll learn here how passively investing in real estate syndications can potentially create an excellent hedge against inflation. Real estate investments can create an inflation hedge especially as property values increase.

A commercial property investment such as a multifamily apartment complex can help offset the impact of inflation. Certain asset classes fare better than others because rental rates can be increased in an inflationary environment. Real estate can provide a good hedge as inflation rises and this inflation risk in the united states can not only affect the cost of living but the higher inflation creates a higher cost and inflationary pressures to the price of goods, which can slow economic growth.

Prices Keep Rising

The CPI or (Consumer Price Index), essentially measures the inflation rate – it gives a weighted average of the price of a group of different goods and services to determine an index that can evaluate consumer price increases. Currently, the CPI is 5.4%, which means prices have risen with the weighted average of 5.4% over the course of 12 month period.

When the cost of goods and services increases for companies, the cost is naturally passed onto the consumer. This is inflation’s impact.

Take, for example, the current market conditions in the housing industry, which is causing a sharp increase in construction costs and labor costs in the building sector. Those costs will be passed onto the consumer who is purchasing or renting that real estate.

How Does Inflation Affect The (Non-Investing) Consumer?

As consumer prices rise 5, 6 or 7 percent and wages aren’t keeping up with inflation by at least 5, 6 or 7 percent, then you’re getting hit pretty hard as a consumer. So, the only way a consumer can compete with the cost of inflation is by getting investment returns on their capital that EXCEEDS the cost of inflation. A consumer can potentially achieve that goal by investing passively in commercial real estate syndications. We’ll talk more about that in a moment.

So, in short, if a consumer is not getting a return on their capital (ie savings, etc.), then they are losing their purchasing power each and every day.

How Can You Benefit From Inflation By Passively Investing In Commercial Real Estate Syndications?

There are 3 ways to get ahead during an inflationary period by passively investing in real estate:

1.  Low Debt vs. Cost of Inflation

Inflation can actually benefit you as an investor when you passively invest in a real estate syndication because we have the ability to secure long-term, low-interest debt at say 3 percent when inflation is running at 5 plus percent. That means that we’re securing debt and paying the debt back at nearly half the cost of inflation. Simply put, we’re paying back future debt with “less expensive” dollars.

2.  Price Inflation

The cost of everything goes up during inflationary events, so that means that when you passively invest in commercial real estate, that the commercial real estate value will likely increase in price as well. We never bank on appreciation as an investment strategy, but we cannot overlook the fact that inflation has historically caused the price (or valuation) of real estate to increase.

This means that when you invest passively in an apartment building, historically the property value increases with inflation – especially if a low-interest-rate debt is available. We are able to increase the valuation largely because as property owners and operators of these hard assets, with the proper lease structure, we can adjust rents upward and increase rental income in accordance with the rising inflation. In fact, some leases are written so that increases are tied to the CPI – the Consumer Price Index that was mentioned earlier.

You might be asking…How do you know you can raise rents? Fair question. Well, remember costs are rising everywhere – most especially in the construction industry with increased labor and construction supply costs. This is putting increased pressure on demand for housing as the housing supply lags due to these constraints.

As a result, it becomes more difficult for people to purchase a home, so they resort to renting. That’s why we can typically outpace inflation when you passively invest in sound real estate investments, and the higher the revenue (Net Operating Income) generated in commercial properties, the higher the increase in the asset’s value – that’s how valuation in commercial real estate is determined.

Generally speaking, the value of real estate will tend to go up with inflation if the hold term is five, seven or ten years, which our typical hold periods for our commercial acquisitions are generally five to seven years.

3. Cash Flow Investing 

First and foremost, we invest for cash flow. If a property is not cash flowing, it is unlikely we will purchase it unless we are doing a heavy value-add, repositioning approach.  Good returns are imperative when passively investing in real estate.

In fact, Berkadia released a white paper that compared the performance of passively investing in private commercial real estate investments and that of the performance of passively investing in REITs and the stock market. One of the major conclusions in the white paper detailed the fact that commercial real estate investors who passively invest in private commercial investments had better returns during periods of both moderate and high inflation, and that the returns on REITs and stocks fared worse during high inflation.

Even more compelling were their findings comparing individual property types. What they found was that passively investing in privately owned apartment communities (the type we acquire) had the best risk-adjusted returns of any asset class during times of both moderate inflation (2-5 percent) and during times of high inflation (5+ percent).

Takeaways

  • So, the bottom line is if you are saving your money and not making a return on that capital that exceeds the current rate of inflation (at just over 5%), then you are losing money each and every day. So, if you have $100,000 sitting in a savings account, you’re losing over $5,000 just to inflation. That’s your hard-earned capital just disappearing.
  • You should explore passive investing opportunities in real estate assets that can create a hedge against inflation. Don’t just put your money into something that you’re hoping to “buy low” and “sell high”. That’s gambling.
  • Always look for passive real estate investment opportunities that cash flow from day one.
  • According to Berkadia, passive investing in commercial real estate syndications such as apartment communities can give you the best risk-adjusted returns in times of both moderate inflation and high inflation.

So, investing in the best risk-adjusted asset class that has the best performance during times of moderate to high inflation seems like a plan worth exploring!

This is where we put in our disclaimer – We are never giving you investment, financial or tax advice, and we always ask that you seek advice from a licensed professional before making any investment, financial or tax decision.

Ready to Learn More? 

The best way for you to learn more about passive investment opportunities in commercial real estate syndications is to join the PCRP Passive Investor Club.

Through the PCRP Passive Investor Club, you’ll get a priority review of all the deals we offer. We’ll work with you to determine your investing goals and then present you with the best deals to meet those goals. We’ll then guide you every step of the way as you invest in those deals.

So if you’re ready to start investing passively in institutional-grade, commercial real estate in fast-growing, climate-resilient markets in the U.S., join the PCRP Passive Investor Club  – IT’S FREE! – and get started on your path to EARN PASSIVELY and LIVE ABUNDANTLY!

If you would like to know more about what we do and how it may be of value to you, please reach out to us anytime.  We’re always happy to help!

 

 

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