Why is real estate the best investment class during an inflationary environment?

 

After experiencing one of the most prolific periods in the history of the real estate market, investors are cautious about what comes next, amid rising inflation, and the upcoming monetary tightening.

Along with these headlines, we have an incredibly strong real estate market soaring to new records, that is showcasing a much stronger resilience than many investors would have anticipated.

Why is the real estate market positioned to continue its winning run, despite the temporary headwinds at the moment?

Cash is no longer the king; real estate claims the throne!

Real estate has long been considered to be one of the most stable and attractive investment classes in the US! Some people claim that during turbulent and unpredictable times, cash is king.

Fast forward to 2022, and a clear winner emerges. Unlike cash, that is losing value every day with rising inflation, gold as a perceived store of value that does not provide any cash flow, certificates of deposit, fixed-income and government securities that offer extremely low and unattractive yields, or risky assets that take investors on a wild ride with incredible volatility on a daily basis, real estate emerges as a clear winner in the race for investors that seek a more stable path towards wealth building through steady cash flow and capital appreciation.

To sweeten the deal, real estate provides incredible tax incentives that enable investors to write off mortgage interest, property taxes, depreciation, operating expenses, and invested capital to repair or maintain the property.

An additional investment benefit for real estate investors that are planning to build, acquire or renovate a building, or have done so in the past several years, a cost segregation study could be a powerful tool that will identify and reclassify personal property assets to shorten the depreciation time for taxation purposes that might decrease their current income tax obligations. Real property eligible for cost segregation includes buildings that have been purchased, constructed, expanded or remodeled since 1987.

You should always consult with your lawyers and accountants before deciding which would be the best strategy for you.

Not all real estate legs provide the same returns

All real estate legs are not the same, and each one of them carries different opportunities and challenges. Investors need to take into account that the value of their real estate properties is not guaranteed either, and that just like with every other investment, there is a probability that the market might reverse or experience a slowdown that could affect their planned cash flow and future capital appreciation.

Industrial, lodging, office, and retail have been hit the hardest by the pandemic. The reopening has helped some of them alleviate the impact, but a combination of various factors forced a lot of businesses into bankruptcy, and a lot of the surviving businesses are still struggling to find their path towards sustainable profitability. However, this situation provides an attractive opportunity for contrarian investors with a patient and long hold mentality.

An additional risk when it comes to industrial, lodging, office, and retail real estate is that they are much more vulnerable to the overall market environment and depend on few or sometimes a single anchor tenant that makes them much less stable than single family or multifamily properties.

Single family homes are less expensive, have relatively low tenant turnover, help diversity an investment portfolio and are easier to exit as investments, but on the flip side, single family home investments have slower growth, lower cash flow, repairs add value to only one property, have significantly less scalability potential, and historically have attracted very high competition.

On the other hand, multifamily offers an incredible opportunity for faster portfolio growth, significantly higher potential to profit from economies of scale, easier and more cost-effective property management, excellent cash flow and appreciation value potential and stable control over your income and asset value.

The fact that multifamily has been a darling for real estate investors does not come to a surprise, as multifamily provides a unique combination of benefits to real estate investors encompassing passive income, scalability, appreciation, leverage and incredible tax benefits.

Net demand for market rate apartments in 2021 was at record high 673 000 units. This has been the highest in three decades and smashed the previous record from 2000 by 66%.

Nearly 360,000 market-rate apartment units completed in 2021. That milestone has been the highest addition in more than three decades on the supply side. Another 682,000 units are under construction. Of those, roughly 426,000 are scheduled to complete in 2022⁠—marking the first time since 1987 supply will exceed the 400,000-unit mark.

Favorable policies combined with shifting market preferences, downsizing baby boomers, millennials, and Generation Z contribute to an explosion in multifamily demand, that is very likely to continue its impressive run due to the necessity of the US to build another 4.6 million units by 2030, just to meet the annual demand of 330 000 units. The annual supply of newly completed 330 000 has been hit only several times since 1989.

These figures, combined with the fact the almost 50% of multifamily apartments in the US were built before 1980, makes it very likely to fuel additional cash flow and capital appreciation for multifamily investors despite the temporary short-term headwinds of heightened inflation and monetary tightening.

How to use real estate investments as a hedge against inflation in a competitive real estate market?

Smart investments like property renovations could not only increase the overall property value and create future potential attractive capital gains for real estate investors, but it could serve as an excellent hedge against rising prices by outpacing the potential rising inflation.

With the rising property prices of real estate in primary markets across the US, secondary and tertiary markets have grown in popularity among creative investors looking to maximize their returns due to the multiple investment benefits including excellent value-add opportunities and potential for attractive returns, less bidding competition, strong growth, accessibility and investment value, and immense risk-reward potential.

Multifamily values are increasing faster for suburban properties than urban ones in major metros. The saturation in primary markets translates into few attractive investment opportunities. Repositioning of B and C class properties in secondary and tertiary markets could provide almost equivalent or better returns for real estate investors than focusing only on primary markets and A class properties.

The pandemic changed how people live and work. As growing number of people are now working from home or through a hybrid working regime, they started valuing amenities, space, and overall quality of life more than ever before. Due to the rising rents and property prices in primary markets and A-class properties, many residents are willing to make a compromise on the location or property type in order to have the amenities, space, and type of lifestyle they always wanted. In-room washers and dryers, kitchen and bathroom remodeling, and relevant amenity upgrades are most likely to provide the best ROI for real estate investors.

The market trends and affordability of tertiary and secondary markets are making them attractive relocation spots while presenting attractive investment opportunities for real estate investors.

Strategic partner selection

This factor could make all the difference between poor, average, and exceptional returns. Selecting the right strategic partner with a proven nationwide track record that can successfully complete the entire renovation process under the agreed terms, with high quality execution, and without any delays, provides the best value and investment returns for real estate investors.

Seeing the final product of your investment project and getting what you want, on time and without any stress in the process is simply priceless.

 

Ready to start your next investment project?

Please contact us to learn how we can best help you to turn your next investment project into a success.

 

Email: hello@adivoconstruction.com

Telephone: (954) 570-0300

Address: 850 SE 7th Street, Deerfield Beach FL 33441

 

About Adivo Construction

We are a national general contractor with over 50 years of combined construction expertise specializing in the value-add improvements of apartment communities.

Our mission is to assist our clients in finding the right balance between capital expenditure and appreciation potential by designing and executing customized renovation programs that are focused on increasing cash flow return and overall return on investment.

We have completed over 100 repositioning projects for publicly traded and privately held domestic and foreign companies in states such as Florida, Texas, Kentucky, Oklahoma, Georgia, South Carolina, Utah, North Carolina, Tennessee, Indiana, Michigan, Missouri, Arkansas, Ohio, Arizona, Nebraska, and Kansas.