Is Real Estate a Good Hedge Against Inflation?

Is Real Estate a Good Hedge Against Inflation?

Active investors keep an eye on their money, the economy, and on what’s happening on Wall Street. One question that often asked—is real estate a good hedge against inflation? Understanding what a hedge is and how inflation works will help explain why hedges, and in particular, a real estate inflation hedge might work for many investors. is real estate a good hedge against inflation

What is a “Hedge” in Investing

So much of what happens in the U.S. and abroad can hurt consumers and investors. Rising prices, economic downturns, natural disasters, and inflation can create great uncertainty—real and imagined—in the economy. At times, it feels as if the U.S. is just one more negative consumer confidence or jobs report away from complete disaster. Including tangible assets in your portfolio is a way of offsetting these disturbances. These types of investments are considered “hedges,” because they are less exposed to the rise of inflation and other negative events. Hedges help protect the value of investment dollars. Hedges can include gold, bonds, commodities, and real estate. There are other types of hedges investors can use as well. Some of these include more complex financial instruments such as derivatives for example. For the purposes here, we want to simply understand what a hedge is and to later understand how the real estate investment hedge is a possible play for many active investors. Investopedia uses this simple explanation to describe hedging:
The best way to understand hedging is to think of it as a form of insurance. When people decide to hedge, they are insuring themselves against a negative event’s impact on their finances.
  Source: Investopedia   One of these negative events, inflation, is one every investor should understand. And finding out why is real estate a good hedge against inflation can provide investors with another tool in their toolbox to protect their wealth. But what is inflation and why should we care about it?

Inflation 101

Inflation is the rate of rising prices for goods and services. This rise in prices can occur in different ways.

Raw Materials

An increase in the price of steel from China, can put pressure on consumer pricing. Manufacturers absorb and then pass on those rising material costs down through their supply chain. As a result, distributors pay more, retailers pay more, and ultimately the buying public pays more. Those raw material costs don’t happen in a bubble, they affect everyone.

Increasing Wages

If employers need to pay more for workers, this can create a rise of inflation. As a business’s payroll increases, they need to find ways to remain profitable. One obvious action they might take? You guessed it—they raise prices on their goods or services, and the consumer foots the bill.

High Demand

Consumers might want something so badly they’re willing to pay higher prices. A demand for necessities such as food, housing, or gas can drive up prices as those items become scarcer. Case in point: think about the demand for housing right now. A scarcity of available homes created buying frenzies in many parts of the country, where buyers overspent on the price of homes in sometimes dramatic fashion. excessive buying encourages inflation Excessive buying can lead to product shortages and rising prices

The Effect of Inflation

Inflation erodes the value of the dollar, affecting consumers ability to buy goods and services. With the U.S. dollar worth less, consumers are forced to spend more. This can set off a chain of events that impacts the economy at large. Because of its effects on the dollar, this in turn impacts your rate of return on your investments. For example, if your investments generate a 7% return, but inflation is at 5%, your net gain is only 2%. In this scenario, your investments are not keeping pace with inflation. The investor is essentially losing money to inflation.

Not So-Fun Fact: If a 5% rate of inflation sounds high, you’re right. But this is exactly what is happening right now as inflation is at its highest rate (5.25%) in 30 years!

Enter the Fed

Part of the Federal Reserve’s job is to watch and react to the ebb and flow of inflation. The Fed wants to keep inflation at the 2% mark and makes policy adjustments to keep prices from increasing too much or too quickly. They understand what the trickle-down effect is when inflation rages out of control. Things become more expensive, companies lay off employees, and the larger economy struggles.

Historical Rise of Home Prices

Home prices follow a similar historical trend in comparison to the growth of inflation. Though at times the housing sector has taken steep downturns, generally home price values keep up and typically beat the rate of inflation. inflation and home prices over time Source Data: Federal Reserve Economic Data (FRED) and MacroTrends  

Advantages of Having Money in Real Estate

  1. Over time a property owner lowers their home’s Loan to Value. As an owner pays down the mortgage, for example, this builds equity.
  2. Home values have historically grown over time. As home values rise, equity in the property also increases.
  3. Inflation rises slowly. This steady, but slow rise over time makes it easier for properties to hold their value.

The Real Estate Inflation Hedge

Every investor wants some level of stable investments to round out their diversified investment portfolio. Stocks and bonds can fluctuate widely, so having a hedge strategy in place can help you sleep at night. You can begin investing in real estate today without the hassles of fixing and flipping or acting as a landlord. Secured Investment Corp.’s Fund III allows investors to invest in real estate at a very low cost. This fund is fully audited by Verivest and only requires and initial investment of $1000. Click to receive the Fund III Infopak for FREE and learn more about investing in real estate.  
 

EARNINGS DISCLAIMER

Earning and Income statements made by our company and its customers are supplied directly from the company or customer. Any and all claims or representations as to income earnings made on our web sites or in our materials or information are not to be considered as average earnings. There is no guarantee that you will make these levels of income — in fact, most people do not — and you accept the risk that the earnings and income statements differ by individual. Individual performance depends upon each customer’s unique skills, time commitment and effort. Our programs are not designed or intended to qualify individuals for employment. Our programs are avocational in nature and are intended for the purpose of the personal enrichment, development, and enjoyment of individuals.

Past performance is not an indicator of any future results. All investments contain risk and may lose value. Any historical returns, target returns, expected returns or probability projections may not reflect actual future performance. Investors should not rely on forward-looking statements because such statements are inherently uncertain and involve risks. While the data we use from third parties is believed to be reliable, we cannot ensure the accuracy or completeness of data provided by investors or other third parties. We do not make any representations as to the accuracy or completeness of the information contained on this website and undertake no obligation to update the information. Neither Secured Investment Corp. nor any of its affiliates are registered investment advisors or broker-dealers and do not provide investment advice. No communication from Secured Investment Corp. or its affiliates through this website or any other materials is intended to be or should be construed as investment, tax, financial, accounting or legal advice.

THERE IS NO ASSURANCE THAT ANY STRATEGY WILL SUCCEED OR THAT ANY PROGRAM WILL MEET ITS INVESTMENT OBJECTIVES.

Secured Investment High Yield Fund II, LLC is open to “accredited investors” only, through an offering made in accordance with Regulation D, Rule 506(c) of the Securities Act of 1933, as amended. In purchasing securities through a 506(c) offering, we are obligated to verify any participating investor’s status as an “accredited investor” in accordance with Rule 501 of Regulation D.

Circle of Wealth Fund III LLC has filed offering circulars and may make additional filings with the Securities and Exchange Commission covering its current offering of membership interests. Each investor should carefully consider the risk factors and other information discussed in the qualified offering circulars (including any amendments) before purchasing membership interests. The Offering Circular and other supporting documentation may be found at: https://www.sec.gov/cgi-bin/browse-edgar?CIK=1762825