The U.S. is at a turning point in economic growth and rehabilitation in the wake of the pandemic. Due to the Federal Reserve’s attempts to mitigate the financial crisis caused by Covid and subsequent shutdowns by circulating more than $5 trillion in new cash, fear of inflation is looming.

With potential economic instability on the horizon, it’s a smart idea to consider this in your investing strategy. To hedge against inflation, seeking out assets that have proven to be more reliable in the past, including multifamily housing, could be a viable approach for you.

Multifamily units appeal to investors and renters alike

Given that other types of real estate investments, such as office or restaurant space, may be more turbulent as work from home and limited indoor dining persist, it makes sense that many investors would look for opportunities with more predictable returns.

Fortunately, rental demand is increasing as the U.S. comes out of the pandemic. Due to the economic fallout of the shutdown, many people are left un- or under-employed and are looking to maintain rent instead of pouring their savings into the housing market. Millennials, in particular, will likely remain on the rental market for a longer period of time. The conditions created by the pandemic will likely cause them to seek out lower rent in multifamily properties outside the city, creating a potentially strong market for suburban multifamily investments.[1]

What’s more, the combination of inflation – i.e., a decrease in consumer purchasing power – typically increases home values.[2] This makes it harder to purchase a home, especially for first-time homebuyers who don’t have the benefit of leveraging increased equity on an existing home. These conditions drive overall housing demand toward rentals and enable landlords to ask for higher rents.

Investor excitement coupled with increasing renter demand is expected to help propel the multifamily industry to success in 2021.[3] But what about the impact of looming inflation?

Multifamily investments could be a good inflation hedge

With the fear of inflation emerging, you may be particularly wary of where you put your money. Ideally, you’re looking for assets that benefit from inflation, or at the very least, are not negatively affected by it. Investments in dividend-paying stocks, for example, are risky as an increase in inflation tends to correlate with a price decline in growth stocks.[4]

So why does real estate historically serve as a classic inflation hedge, specifically the multifamily industry? Landlords can raise rent prices to match inflation and continue receiving their desired income without increasing debt repayment. As landlords generate higher rent income while debt repayment remains at a fixed price, net operating income (NOI) increases and improves the profitability of the investment. NOI increases could also lead to increased valuation of the properties.

Further, unlike office and retail rents that often operate on long-term (five-plus years) leases, the short-term nature of residential real estate leases (generally just one year) allows for regular rent increases to match macro-economic conditions.

One final consideration is that investors can make returns on multifamily investments by leveraging depreciation. Although the value of multifamily assets is expected to increase in the near future, IRS rules allow investors to depreciate the value of aging elements of the asset, which reduces taxable income and tax liability, thus helping to maximize the amount of money retained each year.[5]

Ready to elevate your investment strategy?

Take the time to assess your investment strategy, safeguard your capital from inflation, and provide more asset protection. Check out some of our ongoing multi-family developments and reach out to discuss similar opportunities we have on the horizon.

 

 

 All investing involves risk, including the risk of loss of principal. Investors should be aware of additional risks associated with alternative investments due to factors such as economic and political instability, regulatory requirements, increased volatility, illiquidity, higher management fees, lack of performance history, currency fluctuation, and differences in auditing and other financial standards and that these risks can be accentuated in alternative investments. Alternative investments may be suitable only to those who understand and are willing to assume the economic, legal, and other risks involved.

The foregoing is not a complete list of the risks involved with alternative investments. You should thoroughly review all pertinent offering documents with respect to alternative investments with your financial, legal and tax advisors to determine whether the investment is suitable for you in light of your investment objectives and financial circumstances. 

Circle Squared Alternative Investments, LLC (“CSQ”) is an SEC-registered investment adviser with its principal place of business in the State of New Jersey. Registration does not imply a certain level of skill or training.  CSQ may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by CSQ with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration where the prospective client resides. For information pertaining to the registration status of CSQ, please contact CSQ or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). For additional information about CSQ, including fees and services, send for our disclosure statement as set forth on Form ADV from CSQ using the contact information herein. Please read the disclosure statement carefully before you invest or send money. 

 

 

Sources
[1] (Jetti, Forbes, 2021)
[2] (Gallagher, SFGate, 2018)
[3] (Rastegar, Forbes, 2021)
[4] (Zucchi, Investopedia, 2020)
[5] (Khlief, Forbes, 2021)