How to Use Real Estate to Hedge Against Inflation

TIM THOMAS

The federal government has committed roughly $13 trillion ($13,000,000,000,000) on pandemic-related spending since early 2020. These trillions of dollars have to come from somewhere. Some money spent by Congress will have to be borrowed, but the Federal Reserve will ease create some by simply lending the government money out of thin air.

Read: printing money, even if it happens through digital ones-and-zeroes rather than a printing press. All that new money has sent inflation skyrocketing 6.2% from October 2020 to October 2021, the fastest pace in 31 years. And the supply chain bottlenecks and labor shortages sure haven’t helped.

So what’s an investor to do to prevent their greenbacks from losing all their value?

A (Quick) Overview of Inflation

Around 30 years ago, in 1991, one dollar was worth more than twice today’s dollar. Play around with the BLS inflation calculator to get a sense of the power of inflation for yourself. The average cup of coffee costs $1.49; today, people blow several times that on Starbucks. The purchasing power of a million dollars today only required about $500,000 back then.

Real Estate as a Hedge Against Inflation

Real estate values and rents not only tend to keep pace with inflation but drive inflation itself. As a result, they often rise faster than the official CPI inflation index.

In the third quarter of 1991, the median US home price was $120,000, per the Federal Reserve. Yet home prices in the third quarter of 2021 reached a median value of $404,700 — over three times higher than 1991, despite inflation only accounting for a fraction of that rise.

Rental Properties’ Protection from Inflation

Every year, the dollar loses a little value. And every year, landlords raise rents (or at least they should) to keep pace with or surpass inflation.

For this reason, rental properties offer excellent protection from inflation. You buy the property with today’s dollars, borrow a fixed-interest rental property loan, and then raise rents even as your mortgage payment stays the same.

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