Updated: Feb 14
The US inflation rate clocked in at 8.5% in July, the fifth month in a row over 8% and a far cry from the Fed's 2% target. As a result, many people are seeking out the best inflation hedges in order to preserve their capital and future purchasing power.
Millions of Americans have been impacted as pricing for basic goods like food, gas and heating oil have all risen dramatically since the pandemic started. Despite the recent pullback, average gasoline prices across the US have nearly doubled from this time in 2020, and analysts expect increasing price pressures as winter looms in Europe and the US.
Is help on the way? The recently passed Inflation Reduction Act received a lot of media coverage, but experts are predicting that it will do little to nothing to stop inflation any time soon. In fact, many economists expect the Act to contribute to increasing inflation through 2024.
Investing in Multifamily Real Estate
One of the best strategies savvy investors use to protect themselves from the harmful effects of inflation is investing in multifamily real estate. It's served as a high-quality inflation hedge for generations.
There are a number of reasons people turn to multifamily investments to protect and grow their wealth:
Everyone needs a place to live – It's obvious, but at the most basic level, everyone needs a place to live. When the cost of home ownership rises, tens of millions of people rely on rentals for their housing needs. No matter how high inflation gets, there will still be demand for multifamily real estate; housing is one of the most essential of all human needs.
Rental Price Increases: In todays market specifically, rent growth has remained strong as the combination of rising interest rates and low supply have made the costs of owning a single family home increasingly difficult for many. Most multifamily leases are only 6 or 12 months, meaning you should be able to increase the rent in your multifamily property on a regular basis to keep up with inflation.
Appreciation – Multifamily properties tend to appreciate in value over time. This is because they are scarce desirable assets. As long as property prices continue to increase and keep pace with the price rises of expenses, then multifamily real estate should remain an excellent inflation hedge.
Tax Benefits: While there's a tendency to focus on cash flow and property appreciation, there are a variety of tax benefits associated with multifamily investments which can be a major component of total returns.
You Don't Have to Be A Landlord: When many investors consider multifamily investments, it often conjures images of leaking pipes, clogged toilets and late night calls from tenants. Fortunately, there are many ways to get involved with multifamily, including passive investments through multifamily syndication via firms like my company, Blue Lake Capital.
Challenges of Multifamily as a Hedge Against Inflation
Clearly, while multifamily real estate makes an excellent inflation hedge, that doesn’t mean that it doesn’t come with challenges, especially higher operating costs. As the costs of goods and services rises, smart operators focus on keeping expenses in control and focusing on cash flow.
This often means putting off unnecessary projects, particularly cosmetic renovations. As demand for rentals rises, the return on investment for those type of projects is unlikely to improve your properties' performance; they'll just have a negative impact your bottom line.
It's far more important to save your renovation budget for things that truly need to be maintained, upgraded or repaired, or other renovations that cannot be put off and may impact rents and occupancy.
Finally, the tax advantages of multifamily can also help limit expenses. Generally, there are a variety of deductions real estate investors are able to take advantage of, such as:
Property management fees
Home office expenses
Travel and mileage expenses
Software, tools, or other real estate support expenses
Make sure you work closely with your tax professional and claim all of the applicable deductions available to you.
What Are Some Other Investments to Hedge Inflation?
At times like these, investors hear about a lot of different ways to stay ahead of inflation. Here are some of the other options that people will commonly consider:
Gold – Along with real estate, gold has been one of the most trusted inflation hedges, historically speaking. But does gold really stack? Over the past two years, the price of gold actually dropped from about $1,940 to about $1,725. Incurring a double digit loss during one of America’s highest inflationary periods of the last century hardly sounds like a store of value, and the domino effect of lower gold prices has impacted the overall industry as stock prices for high yielding miners have also suffered.
Bitcoin – Looking at August 2020 to August 2022, the price of Bitcoin increased from about $11,700 to about $20,000, an increase of just under 60%. So, while "HODLers" encourage investors to "zoom out" and see how Bitcoin acts a store of value, it's not for the faint of heart. It's considerably more volatile than real estate - that $20,000 price is down from an all time high of $69,000 in November 2021. Plus, with increasing governmental scrutiny on cryptocurrencies, it remains a very speculative bet. As we've seen time and again, Bitcoin is vulnerable to hackers, lost keys, and scams. Finally, unless you're staking your Bitcoin (another risky proposition), it fails to deliver any cash flow.
Cash, Treasuries, TIPS, and more: Many investors look for ultra safe havens in time like these and there are a lot of options out there, and one of the biggest benefits is liquidity. The dollar has remained stubbornly strong despite the Fed's best efforts, so you could consider options like high yield savings accounts, CD's and money markets to provide at least a little better return than a traditional savings account. Many, including Warren Buffett, look short term treasury bills as safe haven and, now that rates are over 3%, can generate cash flows and carry their own tax advantages. The bad news? Generating 1-3% yields while inflation grows at 8+% will only reduce capital and purchasing power in real terms.
What is the Best Way to Protect Your Money from Inflation?
Of all of the options mentioned, real estate is the only one that appreciates in value and generates cash flow. This is why so many investors believe in investing in multifamily real estate, making it our choice as the best hedge against inflation.
You don't need to be realtor, attorney, or property manager to succeed with multifamily real estate either. If you are an accredited investor, you can work with a multifamily sponsor that handles property selection, deal completion, property management, and distributions on your behalf. This allows you to enjoy the benefits of cash flow and asset appreciation on a long-term basis.
Inflation hedging needs to be a part of every investor’s overall strategy today. The government is taking steps to fight inflation through raising rates and legislation, but with so many factors pulling in the opposite direction, it hasn't been enough. And, as Jerome Powell recently warned, this could mean more rate hikes and keeping rates high for longer than anyone would like to see.
Invest with Blue Lake Capital
If you are interested in learning more about passively investing in multifamily properties, click here to schedule a call with the Blue Lake Capital Team.
About the Author
Ellie Perlman is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.
Ellie is the host of REady2Scale, a podcast that highlights the assets, processes, and strategies for the multiple approaches to successful real estate investing.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.