Real estate investors, along with the rest of the world, are experiencing an inflationary environment. Even investors with a diversified portfolio are looking for more ways to create an inflation hedge.
You're feeling this same decline in purchasing power at home as you pay more daily at the pump, face rising energy costs for the summer, and see the cost of food and clothing shoot upward for your entire family.
You want to make sure your family is well-provided for even in challenging times.
One of the best ways to hedge against inflation is real estate investing in "sticky assets".
Let's take a quick look at our economic environment, the definition of "sticky" real estate, and then how specific types of real estate can hedge against inflation.
Rising Consumer Price Index and Interest Rates
The Federal Reserve has raised interest rates with the hope of curbing high inflation.
As consumers see their monthly payment go up in almost every area, investors are looking for an investment strategy that will work as an inflation hedge, provide income, and create long-term cash flow if inflation hits even harder.
This is where the "sticky" asset classes of real estate come into play. Real estate prices continue to rise, but not all commercial real estate provides the same long-term value and rental income that you want from real estate investing.
Because you entered real estate to avoid the fluctuations of the stock market, maintain your level of purchasing power, and gain inflation protection, let's define the term "sticky" and how such investments can work for you.
Defining "Sticky" Assets in Real Estate
"Sticky" real estate is the idea that the revenue stream of the property is consistent over the long term. Commercial real estate is valued by tenants and whether or not it is a piece of income-producing real estate.
Property values in private real estate like houses are often evaluated based on the location of the house. The improvements the neighbors do (or don't) affect your home value too!
However, commercial properties are valued based on their revenue streams and the consistency of those revenue streams.
For example, an office space might have a 95% tenancy rate, but that rate alone doesn't make it a sticky asset class. You also need to look at how likely the tenants are to stay in that building long-term.
Many office buildings do not fall under the umbrella of "sticky" real estate because of various factors such as remote work and ease of moving from one building to another. These office buildings find it difficult to raise rents because the demand is generally low. This keeps investors from having a higher rental income.
However, doctors' offices and other medical buildings are often considered sticky because of the amount of money that goes into building the infrastructure for the building. The medical corporation, rather than the landlord, is usually investing millions in a specialized infrastructure that will keep them in the building for the long term.
These tenants will usually remain even if property prices go up because they would need even more money to invest in a new building. Such office buildings are considered "sticky."
An investment strategy that focuses on "sticky" real estate investments has the potential to stay strong in the face of high interest rates, a steep inflation rate, and a fluctuating stock market.
How does a real estate investment hedge against inflation?
Real estate investing in sticky asset classes can hedge against inflation and bolster your portfolio against a future that may see interest rates rise again.
Multifamily units are often in great demand during a period of high inflation and high interest rates. If families have to downsize their lifestyle as inflation rises, they often move into an apartment or condominium. This property sector often sees consistent income even during an economic downturn.
Storage units can be a good hedge against inflation. People who can't find housing due to high demand or those who are moving into multifamily units due to housing prices often turn to storage units. They'll put the majority of their belongings in storage while they live a more minimal lifestyle. Storage units in this case will often provide positive cash flow and passive income for a real estate investor.
Because real estate rental properties that fall under the "sticky" asset class are often in high demand no matter the economic situation, they are usually a strong source of passive income and a great hedge against inflation.
Real Estate Investment Trusts or Real Estate Syndications?
Real estate investment trusts work more like the stock market and may see fluctuations similar to stock prices. Real estate syndications, on the other hand, usually require more up-front investments but often provide a more stable source of passive income. Alternative investments like real estate syndications can offer you access to "sticky" assets that can hedge against inflation, even if you don't have millions of dollars to buy commercial real estate on your own.
Face the Future with Confidence through Strong Investments
Your peace of mind will allow you to focus on your family and not on your worries about inflation, recessions, or any number of problems on the horizon. Allow investments in "sticky" assets to provide for your family and create a sense of security in an insecure world.
Serving passive investors is the heartbeat of Three Keys Investments and we believe this unconventional process best protects our passive investors capital.
From forming strong partnerships to finding the best opportunities and delivering strong returns we have your best interest at heart.
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This work by Annie Dickerson is licensed under CC BY-NC-SA 4.0