Everyday investors are regularly inundated by financial news outlets warning about the risks of inflation. But it seems like the noise creates more confusion and unanswered questions.
What’s too much inflation? What’s too little inflation? How do I protect myself from inflation and still earn a decent return on investment?
In this article we’ll arm you with the basics on inflation and how online real estate investing can help you prepare for inflation like the pros.
What is Inflation and What Causes It?
Inflation is when the prices of goods and services rise. It generally occurs during two events: economic growth and monetary devaluation. When the economy grows, demand for products and services increases, and without supply additions to match, prices increase. Monetary devaluation is when there is an overabundance of currency in circulation, often a result of countries printing too much money, making the currency less valuable.
How Do I Protect My Portfolio Against Inflation?
Sorry to disappoint, but there’s no magic formula to perfectly hedge against inflation.
Among the worst performers in the face of inflation are bonds – they provide regular coupon payments and the promise of principal repayment. But as inflation takes hold and the value of a dollar is reduced, so is the value of that bond’s cash stream. That’s why bonds offer the least protection of any major asset class against inflation.
Among the out-performers in an inflationary environment are “commodities” like oil or corn which generally appreciate during periods of inflation because they hold intrinsic value – people need oil to power their cars and corn to feed their families. Still, neither oil nor corn offers a dividend yield that offers current cash flow.
Commercial Real Estate – The Best of Both Worlds
It’s no surprise that wealth managers often direct their clients, at least those with the financial wherewithal, to commercial real estate. Why, you ask? Because it is the best of both worlds – a hard asset that holds its intrinsic value over time AND produces dividend income to its investors along the way. Let’s break this down…
Real estate sits on land, the ultimate commodity, particularly in densely-populated areas. The structures that sit on these land parcels produce income based on demand for homes, offices, retail centers, hotels or warehouses – whatever the use may be. Further, while demand for other hard assets may vary based on consumer preferences, demand for real estate is relatively stable, as people will always need places to live, work, shop, visit, and store. These attributes generally preserve the intrinsic value of real estate assets irrespective of inflationary pressures.
But it gets better…
Not only does real estate generally hold its intrinsic value, but rental rate structures generally allow dividends to grow during inflationary periods. Real estate owners can regularly adjust their rental rates, creating the potential for dividend growth to match inflation. That’s why billionaire investing elites, looking to “have their cake and eat it too,” turn to real estate to hedge against inflation. It’s no coincidence that 35 of the wealthiest 400 Americans amassed their fortunes in real estate, according to Forbes.
Online Real Estate Platforms – The Inflation Hedge for the Everyday Investor
Until recently, financial planners could only offer commercial real estate investments to their wealthiest clients, those that are accredited investors. Now with the emergence of online real estate platforms like stREITwise that offer low investment minimums, everyday investors can use commercial real estate to hedge against inflation like the billionaires.
Eliot Bencuya is the co-founder and CEO of stREITwise. Eliot has extensive experience identifying, underwriting, and executing value-add real estate investments.
Prior to forming stREITwise, he was a Vice President of Acquisitions for Canyon Capital Realty Advisors and the Canyon-Johnson Urban Funds, where he was responsible for originating, underwriting, structuring and executing transactions in the Pacific Northwest, Northern California and Midwest regions. Mr. Bencuya also held positions at Sovereign Investment Company (a subsidiary of the Marcus and Millichap Company) and the investment banking division of Merrill Lynch & Co. He holds a Bachelor of Arts degree in Economics and International Studies from Yale University, and a Masters of Business Administration degree from the Haas School of Business at the University of California, Berkeley. Mr. Bencuya is a member of ULI.