If you’ve been paying attention to the economy or the prices of the things you buy on a regular basis, you’ve probably noticed the effects of inflation directly. The cost of almost everything is higher than it was a few years ago, and the talking heads on TV and social media have all issued bleak opinions about how bad inflation has gotten.
However, inflation isn’t all bad – and it can even be beneficial for savvy real estate investors who know how to take advantage of it.
That’s a very good thing because inflation is never going away. It’s going to be with us forever, and it’s only going to benefit people who know how to utilize it.
What Is Inflation?
What exactly is inflation? Price inflation is a trend of rising prices across the board, ultimately due to a drop in the value of money.
It’s easiest to understand this effect with an analogy. Imagine that you pay for everything with gold. A meteor comes crashing down to earth, containing 100 times the amount of gold in circulation, and this gold is freely distributed among the population. Suddenly, gold is less scarce, and, therefore less valuable, so you’re forced to pay proportionally more gold for pretty much everything.
The actual causes and effects of inflation are much more complex than this, but this simple analogy should at least get your intuition working.
In the context of the United States economy, inflation is a result of currency devaluation, usually attributable to monetary policy. When the Federal Reserve, the institution that controls the money supply in the country, decreases interest rates and participates in more asset buying in open market operations, the money supply greatly increases, thereby decreasing the value of each dollar.
Recent Inflation Trends
Our most recent inflation spikes were attributable to ridiculously low-interest rates, as well as the Federal Reserve generating money “out of thin air” to participate in actions known collectively as quantitative easing. Massive government spending packages didn’t exactly help.
As a result, inflation spiked to nearly the highest levels we’ve ever seen. Almost everyone, from investors to consumers, has felt the pain. Recently, that trend has begun to subside, thanks in part to higher interest rates from the Fed and more sensible monetary policy in general.
However, inflation hasn’t gone away. When people reference inflation calming or dying down, they are in no way suggesting that inflation has stopped or reversed its momentum. Instead, inflation has dropped from an absolutely alarming 9 percent to around 3 percent – it’s still here, and it probably will be forever.
Why Inflation Is Never Going Away
Why isn’t inflation ever going to go away?
The simple answer is that the Federal Reserve, and the United States government in general, wants inflation to exist. There are many conceivable explanations for why this is the case, depending on your political persuasion and your interpretation of past events. But no reasonable person doubts that most of the people in charge prefer a small amount of background inflation to occur at all times.
This motivation drives the Federal Reserve to continue keeping interest rates relatively low and participating in open market operations. Accordingly, if you believe the Federal Reserve and the United States government will continue operating for the foreseeable future, you can count on inflation for at least that long.
Why Inflation Can Be a Good Thing for Real Estate Investors
Here’s the good news: inflation can be a good thing for real estate investors.
These are just some of the reasons why.
- Debt value decreases. As the value of the dollar decreases, the prices of most assets increase. But there’s a secondary effect of the dollar decreasing; the value of standing debt decreases. If you take out a loan to purchase a $300,000 house, and inflation cuts the practical value of the dollar in half, the nominal amount of your debt will remain the same, but the practical value of your debt will be halved. In other words, as long as the debt isn’t posing a massive and immediate financial burden to you, debt is beneficial in an inflationary environment.
- Borrowing availability. One of the reasons why inflation exists is because the Federal Reserve is quite loose with its monetary policy. The Federal Reserve mostly lends to a small cabal of corporate banks, but because banks have access to freer money, we all have access to freer money. When inflation exists or is being pushed higher, it’s much easier to borrow the money you need for property purchases.
- Consistent income. Inflation makes it harder to keep up with even your most basic expenses – and especially expenses that are prone to inflation-related increases. But in real estate management, most of your expenses will be controlled, and your income should be consistent. It’s an excellent stabilizing force to have in your portfolio.
- Economic growth. Some economists contend that small, manageable rates of inflation are good for economic growth. If their contention is correct, ongoing inflation rates should increase consumer spending, raise demand, and bring people to economic hubs where property owners can benefit from them.
Benefiting From Inflation as a Real Estate Investor
As a real estate investor, inflation doesn’t have to be your enemy. Sure, it’s going to increase your cost of living and the prices of various expenses related to your properties. But if you know how to time your investments and take advantage of debt value reduction, you can end up in a much better position in the long run.