The second way diversifying a portfolio through real estate helps is because it is in its own class when it comes to types of investments. Including real estate in an investment portfolio can provide massive benefits because of this separation. Real estate has a low correlation with other asset classes, such as stocks and bonds or commodities that are invested in through exchange-traded funds (ETFs). During periods of inflation, when those traditional types of investments may suffer, real estate can act as a counterbalance, helping to stabilize the overall portfolio. Diversification across different asset classes is crucial for managing risk and protecting against the erosive effects of inflation.
Taking advantage of appreciation and leverage
It’s no secret that one of the most positive aspects of investing in real estate is that it is typically an appreciating asset class. Historically speaking, real estate has shown a tendency to appreciate in value over the long term. Property values tend to rise due to factors such as population growth, urbanization, and limited supply in desirable locations. By holding onto real estate assets, investors can benefit from capital appreciation, which acts as a hedge against inflation. As an investor, you can control these valuable assets and use these real estate investments to your advantage. If inflation is affecting a specific area, there is a potential to increase monthly rents and generate more passive income. Also, there may be specific suburbs that see a spike in home value due to inflation that wasn’t previously available. Selling off that property and making a major profit could be an opportunity that presents itself to real estate investors.
The other angle that comes into play which inflates the value of investing in real estate is the leverage or borrowed funds that investors can take advantage of. Real estate investing offers unique opportunities for leveraging borrowed funds. By using a mortgage to finance a property purchase, investors can amplify their returns. In an inflationary environment, the value of the property and rental income may increase, while the mortgage debt remains fixed. This leverage can enhance an investor’s ability to hedge against inflation and potentially generate higher overall returns. Fixed rate mortgages are vital to a real estate investor because of this. There are loan options out there that allow for potential changes in the interest rate over time, and while these may be enticing, when inflation hits and the rate balloons this can have a negative impact on real estate investments. Always look for a fixed rate to avoid this pitfall.
A strategy that is growing in popularity which takes advantage of appreciation and leverage, and can really see an investor’s return on investment skyrocket. It is known as the BRRRR Strategy which stands for Buy, Rehab, Refinance, Rent, Repeat. What this strategy entails is investors buying properties and renovating them in order for the property to appreciate in value much quicker. After the rehab work is complete, an investor can refinance into a fixed rate mortgage and the rental income can be amplified because the property was renovated. If the process is repeated, investors should have a portfolio full of properties that cash flow at a steady clip with loans that are stable due to the fixed rate over a long period of time. These types of portfolios are one of the strongest ways to hedge against inflation.
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