Hardly a day goes by without inflation being a topic of conversation in the news media, on economic forums, and in political blogs.

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Every month, the Federal Reserve — whose goal is to maintain the stability of the world’s largest economy — creates monetary policies that affect
every day Americans, foreign countries, and everything in between.
Inflation is a decrease in the purchasing power of a dollar. What a dollar could buy in 1950 now takes $10 to purchase today. Inflation is caused by a number of overlapping factors.

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For example, during the Covid-19 pandemic, we saw inflation raise the price of goods and services as supply chain issues negatively affected production and delivery. But global pandemics aren’t the only things that cause inflation.

Supply and demand, fiscal policy, corporate policy and manufacturing costs can all lead to inflation. If you’re concerned about what inflation can do to your retirement dollars, it may be time to consider inflation-hedging investments.

 

Unlike stocks, bonds and mutual funds, investing in real estate can make inflation actually work for you, increasing your income as inflation rises.
Where inflation is truly dangerous to the average person is in retirement savings. It can be the slow silent drain that reduces the purchasing power of retirement dollars. While the Federal Reserve believes that a 2% inflation rate is an indicator of a healthy economy, as of February 2022, inflation had risen to 7.9%. Let’s look at an example. Say that many years ago you placed funds into your 401(k) or IRA and allocated it to stocks. From 1999 to 2019, returns of the S&P 500 averaged 5.9%. This means that today, due to inflation, you would barely break even and should expect a loss after paying taxes. In addition, in years past, inflation in the US has risen to levels above 20%. The higher the rate of inflation, the more purchasing power you lose over time, even as the dollars in your accounts increase. People who plan to fund their retirement with IRAs, 401(k) plans and savings accounts can be devastated by the long-term effects of inflation. One way to hedge against this is to invest in real estate.

Then what accounts for the disconnect? Unfortunately, the algorithm they use to determine the CPI isn’t published, nor is it straightforward. And, there are many different indexes that get published and referenced. In particular, the “core” CPI, that many financial analysts follow, excludes the costs of food and energy from its analysis. 
When the BLS calculates the “official” rate, they average in prices for all the categories they monitor. So if the cost of computers or cars goes down, that will offset rising food prices. The trouble is, you buy cars and computers every few years, but you buy milk and eggs every week.
So the weighting may not reflect your actual household spending habits and you could be spending more every month even when the published inflation rate is quite low.

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WHAT CAUSES INFLATION?

When there’s an increase in the money supply, inflation usually accompanies it. This can happen in a couple of ways. Our banking system is built on a concept called “fractional reserves” which allows banks to take in deposits — savings, CDs, money market accounts, etc. - and then lend out more money than they actually have in these accounts. Since it’s not a dollar-for-dollar trade, additional currency is created. When there is growth and the economy is
expanding, this can be a good thing because the money is often loaned to businesses and consumers whose spending sustains the growth.
The downside is that when there isn’t sufficient growth, there isn’t enough demand for the money that’s entered the system. When this happens, the value of the currency decreases, resulting in less purchasing power for everyone.

The second way the money supply gets increased is with the stroke of a pen. The Federal Reserve can simply authorize the printing of more money. In response to the financial crisis of 2008, the Fed stepped in and exponentially increased the monetary base to purchase trillions of dollars in mortgages and bonds. Although this did jump start the economy in the short term, in
the long term, it increased the national debt, which was already burdened by liabilities like social security, Medicare and years of government deficit spending. The consequences of these unprecedented actions — which have been hotly debated for years — will be revealed some time in the future.
Your Mortgage Costs Less Over Time.

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The first and perhaps most important step toward inflation hedging is to buy your own home with a fixed-rate mortgage. If you are renting, you’re not only building someone else’s equity, you are also subjecting yourself to inflated yearly rent increases. When you buy a property with a fixed-interest mortgage, your monthly payment is based on the value of the dollar at the time of purchase. As you make payments over the years, you’re paying with cheaper dollars as inflation rises. For example, if your mortgage payment is $1,000, those dollars will buy 200 loaves of bread today. In 20 years, your payment will still be $1,000, but that may only buy 50 loaves of bread. During those 20 years, your wages continue to rise, so that $1,000 payment feels like less of a
financial burden. The more inflated the dollar, the easier it is to make your mortgage payments in the future and the harder it is to pay rent.

INCOME-PRODUCING PROPERTIES CAN MAKE INFLATION WORK FOR YOU

One thing that generally keeps pace with inflation, and even surpasses it, is rental income from investment property. In fact, in our current inflationary environment, rents in certain desirable cities have increased 30% in the past year. With a fixed-rate mortgage, loan payments stay the same, which creates a spread (more rental income) between rising rents and the cost of you mortgage payment.

Expenses such as insurance and taxes also inflate, however, income-producing real estate tends to have higher rental income than expenses. In our multifamily apartment buildings, for example, expenses are typically half the rental income. When inflation grows, a smaller expense bill is often outpaced by the leap in income caused by growing rent checks. Oftentimes, this
effect can drive greater cash flow and profits in an inflationary environment.

THE MANY WAYS TO INVEST IN REAL ESTATE AND HEDGE AGAINST INFLATION

When it comes to investing in income-generating properties, investors have many options, from fix and flips, to REITs, to syndication, to direct ownership.
When it comes to wealth preservation, we believe there is no better vehicle than through Triple Net Commercial properties.

Triple net assets come with huge tax advantages, strong historical track records, national credit backed tenants, and appreciating markets - making this asset class a go-to for many high-net-worth individuals.
Protecting Yourself Against Inflation Is A Smart Move For Your Future
When it comes to investing for your future, considering the effects of inflation on your assets can help you mitigate inflation before it drains the purchasing power in your retirement accounts. By investing in income-generating real estate, you can hedge your bets against inflation and protect your retirement dollars long-term.

 

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.