Hedging Inflation with Real Estate

Ever since the creation of the Federal Reserve in 1913, the U.S. has been exposed to inflation and the decrease in the purchasing power of the dollar. The good news is, tangible assets like real estate can be a great hedge against inflation.

Inflation is the rise in the price of goods and services, and decrease in the purchasing power of money. As the government prints more money, the value of each dollar decreases causing prices to rise.

What this means to the average person is you can purchase more with $5 today, than you can purchase with $5 in the future.  For example in 1990 the average price for a movie ticket was $4.23 and in 2017 it is $8.64.

Savers vs Inflation

Savers get hit the hardest with inflation. Many of those who accumulate a large amount of savings or inheritance see storing the money in a savings account or CD as a safe place to park the cash.

The problem with this strategy is the rate of inflation in 2017 is over 2% while the interest rates on many CDs are below 2%, and interest on most savings accounts are below 1%.  This means that the purchasing power of your savings is decreasing, and in a way, you are losing money

Spending less money than we make and saving whats left over is an essential part of building wealth. So the solution to this dilemma is to not simply save to save, but to save to invest. After accumulating a nice chunk of savings, its time to invest the savings in an asset that not only out paces the rate of inflation, but will earn a solid rate of return on your money. That way the purchasing power of your money can grow over time.

Real Estate as a Hedge Against Inflation

Many of us are familiar with single family homes and heard about our grandparents buying a house many years ago for $20,000 that is worth $250,000 today.

This occurs because real estate is an asset that's value increases alongside inflation. The value of residential real estate rises and so do the rents of commercial properties, which causes their value to rise as well. So not only will the value of the property keep pace with inflation, you will likely be receiving cash flow along the way.  

That's not all, those who use debt as a way to finance their properties also stand to gain. This is because you are taking out a loan and buying a property in today's dollars but paying the loan back with dollars that are worth less in the future as a result of inflation. 

The Bottom Line

As long as the government continues to print money, inflation will continue and the purchasing power of your savings will decline. A great way to solve this issue is to invest your savings, which sitting in the bank, in assets that are positively correlated with inflation, like real estate. 

Babylon Property Group can assist those looking to start or diversify their portfolio by investing in real estate. For more information please contact us by phone at (631) 253-1609 or email at tcastelli@babylonpropertygroup.com.