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March 31, 2023

Leveraging Multifamily as a Hedge Against Inflation: The Multifamily Solution

Inflation surged to around 6% due to pandemic-related money printing, leading to interest rate hikes and bank collapses.

Leveraging Multifamily as a Hedge Against Inflation: The Multifamily Solution

In the aftermath of the Federal Reserve’s excessive money printing during the COVID-19 pandemic, inflation has soared. In fact, it is currently at around 6% and was even higher than this throughout most of 2022. The Federal Reserve has been steadily raising interest rates in order to combat inflation. However, banks have now started collapsing in part because they are struggling to deal with the steep interest rates.

The Fed stepped in to provide tens of billions of dollars in bailout money to these banks to prevent a massive financial catastrophe. However, now the question is, will the Fed start lowering interest rates in order to ease pressure on the financial system, or will it continue raising them and potentially print hundreds of billions of dollars to backstop financial institutions if they keep failing due to the high interest rate environment?

There are inflationary risks with whichever route the Federal Reserve decides to go. With inflation such a hot-button issue right now, many investors are looking for appropriate ways to hedge against it. Multifamily real estate is one of the best ways to fight against inflation.

Why is Multifamily Real Estate a Hedge Against Inflation?

Multifamily real estate is a hedge against inflation because multifamily property prices tend to go up over time. For example, over the past five years, apartment building prices in the US went up by 37%. The reason why multifamily real estate properties tend to increase in value over time is because they are scarce assets with high demand.

Unlike currencies such as the US dollar, multifamily properties cannot just be printed endlessly. It takes a lot of resources, time, and labor to construct them. So, when the Federal Reserve prints a large amount of currency, multifamily real estate prices tend to simply just go up to account for the influx of currency. This is exactly what happened after the government printed trillions of dollars during the pandemic.

This means that the majority of apartment building owners experienced a tremendous price appreciation for their properties in the last few years. In high inflationary periods, people who participate in multifamily real estate investing tend to see a major increase in the values of their rental income properties, and we are still in a high inflationary period.

A group of buildings with palm treesDescription automatically generated with low confidence

Multifamily Real Estate Vs. Other Inflation Hedges

Real estate is often compared to other inflation hedges such as gold and silver, and more recently, Bitcoin. It is true, that these other assets can serve as effective inflation hedges since they possess some of the same qualities as multifamily real estate such as scarcity and desirability. Assets that are scarce and desirable tend to appreciate in value during high inflationary periods, thus acting as effective hedges against inflation.

However, despite the fact that multifamily real estate, gold, silver, and Bitcoin all have the potential to help you hedge against inflation, multifamily real estate has one major competitive advantage against these other assets: cash flow. Neither gold, nor silver, nor Bitcoin generates cash flow. Yes, they tend to appreciate in value over time, but they do not produce any passive income.

Multifamily real estate, on the other hand, not only tends to appreciate in value over time, but it also produces stable, reliable cash flow. If you are looking to protect your purchasing power from inflation, and to generate a stable source of income during difficult financial periods, then multifamily real estate is one of the very best options. In fact, some would argue that due to its scarcity, desirability, and ability to generate passive income, that multifamily real estate is a perfect inflation hedge.

What Investments Should Be Avoided During Inflation

One major financial mistake that many people make during high inflationary periods is simply leaving all, or a large percentage of their cash in their bank accounts. The problem with this strategy is that cash loses value during periods of high inflation. For example, because 12-month inflation according to the consumer price index is currently around 6%, it means that any dollars you left in your bank account for the last year would have lost roughly 6% of their purchasing power. So, be wary of large cash positions during inflationary periods.

You should also be wary of investing in long-term fixed-rate interest-bearing investments during inflationary periods. You should be especially careful to avoid interest-bearing debt securities with maturities of greater than 10 years. The reason why you should avoid these assets during inflationary periods is because when interest rates rise, the value of the underlying security can drop significantly as investors turn to higher-yielding alternatives.

What About When Inflation Cools Off?

When inflation starts to cool off, you might see a drop in the appreciation rates of your multifamily properties. This is typically because smaller amounts of new money printed by the Federal Reserve will be coming into the system. But, just because your properties will most likely not appreciate as fast, that doesn’t mean that they still won’t appreciate, and it doesn’t mean that you shouldn’t invest in multifamily real estate during low inflationary periods.

In fact, even when inflation rates drop, multifamily properties still tend to go up in value over time, and they still produce ample cash flow. So, essentially, multifamily real estate is typically a good investment in any type of inflationary environment, which makes it one of the most secure and stable investments that you can possibly make.

Many millionaires and high-net-worth individuals are aware of this and that is why roughly 90 percent of millionaires invest in real estate.

Conclusion

People who do not prepare properly for inflation often see a substantial decline in their purchasing power. Unfortunately, all too many people only store their wealth in cash and fail to make investments that protect them from the government’s habit of printing trillions of dollars. If you want to protect yourself from inflation, then you should strongly consider investing in multifamily real estate. Multifamily real estate has earned a reputation as a good inflation hedge over many generations. This reputation did not occur by accident.

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