In the event of an inflation spike, it’s real estate – and not stocks – that can protect investors.
With the United States Federal Reserve printing money at an unprecedented pace and Congress ramping up COVID-19 stimulus efforts, economists are closely watching the U.S. money supply for warning signs of inflation.
From the start of the year to the end of July 2020, the U.S. money supply has ballooned 20%, rising from $15.33 trillion to $18.3 trillion. M2, a broad measure of money supply and future inflation, was up 23% year-over-year in August, surpassing the high growth rates seen during the ‘70s.
When inflation rears its ugly head, the value of the dollar could collapse as the price of goods and services soar. As a result, revenues and profits go down, and the economy slows.
What this means for investors
The threat of inflation tends to send the stock market prices plunging. This is partly because stock prices represent the risk-adjusted current value of a company’s future cash flows, so a rise in inflation can cause it to fall as well.
Another way inflation impacts the stock market has the opposite effect. During times of inflation, rising prices can increase profits as companies make more money from the goods and services they sell. The result is higher future cash flows and, therefore, a higher present-day value. However, history has shown that investors tend to focus on the current value effect of inflation on stocks while ignoring the potential increase in profits and cash flow. When investors panic, stock prices plummet when they shouldn’t, and volatility returns to the markets.
However, not all investments get hit hard by inflation. Certain investments have inherent value and retain it regardless of the strength of the dollar. Real estate is one of the most powerful inflation-resistant assets.
How real estate investments can protect you from a COVID-19 inflation spike
Arguably the ultimate hedge against inflation, real estate tends to see its highest price appreciation during times of inflation. Property values generally appreciate at or above the rate of inflation, as does the amount a landlord can charge for rent. And because people need a place to live no matter how the currency is performing, they will pay whatever the going rate is for rent.
In addition to indirect investment in securities like a real estate investment trust (REIT), real estate investment can come in the form of direct ownership of income-generating rental property. A prime investment to combat inflation, rental properties come with ongoing benefits like passive income, tax incentives, and the ability to leverage someone else’s money.
Keep in mind that inflation comes with advantages if you can increase rent faster than your expenses. However, not all property values will rise equally during periods of inflation. Higher-quality real estate in in-demand areas tends to weather inflation better than less desired properties, so it’s important to choose your investment property wisely.
If you are considering investing outside of your home country because of the uncertainty caused by the global pandemic, investing in premium rental properties in Colombia is a smart way to spread risk and generate higher returns. For advice on purchasing income-producing rental property in an up-and-coming area in a top city like Medellín, fill out this short survey and someone from Lifeafar’s dedicated residential sales team will be in touch.