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Since 1967 real estate inflation has increased at 4.19% on an annualized basis. During that same time, inflation rose at a 4% average annualized basis. The small 0.19% difference may not seem like much, but it does mean real estate has been a notable hedge against inflation when held for the long haul.
Inflation and real estate inflation often move independently of each other, meaning some years home values may rise much faster than inflation or visa versa. In the end however, real estate has come out ahead. So in today’s high inflationary times, real estate can prove to be a possible avenue for combating inflation. But certain types of real estate investments can offer better hedges than others.
If you want to make the most out of your investment efforts and dollars while inflation soars, here are the three of the best real estate investing techniques to use today.
Outside of a few types of real estate, most leases are contracted for periods of anywhere from five to 30 years, with contractual rent increases built in. These rate hikes do help account for normal inflationary periods, but when levels near double digits like right now, long term contractual rate hikes may not be enough. That’s why short-term leases are king during inflationary periods because landlords can quickly increase the rent on them to compensate for the higher costs of owning and operating their properties.
This can help the property owner continue to generate a positive cash flow despite higher costs to own and manage the rental.
It also helps that residential property plays an essential role in our economy. Unique market factors like job opportunities, housing supply, and affordability, among others, ultimately drive the supply and demand for a market. Meaning some markets may see more long term housing demand than others. But generally speaking, people will always need a place to live. Choosing your rental investment market wisely could help you ride through the ups and downs of challenging economic periods where demand may be lower. There are also a host of other benefits in owning a rental property like tax deductions, deprecation, and income potential.
If you aren’t able to buy and manage a rental property right now, consider buying shares in a residential real estate investment trust (REIT), which can own single-family homes, multifamily apartments, or even mobile home communities. This will give you exposure to the inflationary benefits rental property offers without having to own or manage it yourself.
Mid-America Apartment Communities (MAA 0.07%), which recently rebranded itself as MAA, is one of the premier multifamily property operators, with roughly 102,000 apartment units primarily across the Southeast and Southwest. Its stock has recently taken a hit thanks to general market volatility and growing concern over rising interest rates and the future of the housing market. But despite its beaten-up share price, the REIT is seeing fantastic rental growth with a forecast of 11% to 13% increase in blended rental rates for the full year thanks to strong demand with occupancy levels as of Q1 falling just under 96%.
The self-storage business offers another type of short-term leasing opportunity, and that model, too, fares well during inflationary periods, particularly because the overhead relating to the development and management of the properties is low.
The rates on most self-storage unit leases are locked in for periods of three to six months, or sometimes a year. This allows self-storage operators to increase their rents frequently. Self-storage is also rather resilient to recessions, and while high inflation periods aren’t always accompanied by recessions, economists and market watchers are growing more and more concerned that the U.S. is headed for one soon.
There are five publicly traded self-storage REITs, all of which have performed incredibly well over the past 25 years — coming in as the highest-performing group within the REIT industry. Self-storage REITs have have generated an average return of 18.86% while the S&P 500 during that same time was at 10.6% The largest and most popular self-storage REIT is Public Storage,(PSA 0.58%) which owns or has an interest in 2,600 facilities across the country.
Liz Brumer-Smith has positions in Mid-America Apartment. The Motley Fool has positions in and recommends Mid-America Apartment. The Motley Fool has a disclosure policy.
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