Since 1967, real estate inflation has increased by 4.19% annually. During the same period, inflation increased by 4% on average on an annual basis. The small difference of 0.19% may not seem like much, but it means that real estate has been a remarkable hedge against inflation when held for the long term.
Inflation and real estate inflation often move independently of each other, meaning that in some years home values can rise much faster than inflation or vice versa. In the end, however, real estate came out ahead. So in today’s times of high inflation, real estate can be a possible way to fight inflation. But some types of real estate investments may offer a better hedge than others.
If you want to get the most out of your investment efforts and dollars while inflation is on the rise, here are three of the best real estate investing techniques to use today.
1. Buy a rental property
Outside of a few types of real estate, most leases are for periods of five to 30 years, with built-in contractual rent increases. These rate hikes do help account for normal inflationary periods, but when rates are near double digits, as they are now, long-term contractual rate hikes may not be enough. This is why short-term leases are most important during inflationary periods because landlords can quickly increase the rent on them to offset the higher costs of owning and operating their properties.
This can help the property owner continue to generate positive cash flow despite the higher cost of owning and managing the rental.
It also helps that residential real estate plays an essential role in our economy. Unique market factors such as job opportunities, housing supply and affordability, among others, ultimately drive supply and demand in the market. This means that some markets may have more long-term housing demand than others. But generally speaking, people will always need a place to live. Choosing your investment rental market wisely can help you weather the ups and downs of tough economic times when demand may be lower. There are also numerous other benefits to owning a rental property such as tax benefits, depreciation and income potential.
2. Invest in residential REITs
If you can’t buy and manage a rental property right now, consider buying shares in a residential real estate investment trust (REIT), which can own single-family homes, multi-family apartments, or even mobile home communities. This will give you exposure to the inflationary benefits offered by rental properties without having to own or manage them yourself.
Mid-America Apartment Communities (MAA 4.31%), which was recently renamed MAA, is one of the leading operators of multifamily properties, with approximately 102,000 residential units primarily in the Southeast and Southwest. Its shares have recently taken a hit thanks to general market volatility and growing concern about rising interest rates and the future of the housing market. But despite its high share price, the REIT is seeing fantastic rental growth with an forecast of 11% to 13% increase in mixed rental rates for the full year thanks to strong demand with occupancy rates as of Q1 falling just below 96%.
3. Invest in self-storage REITs
The self-storage business offers another type of short-term leasing opportunity, and this model also does well during inflationary periods, especially because the overhead costs associated with property development and management are low.
Rates for most self storage lease units are locked in for periods of three to six months or sometimes a year. This allows self storage operators to increase their rents frequently. Self-storage is also fairly resilient to recessions, and while periods of high inflation aren’t always accompanied by recessions, economists and market watchers are increasingly concerned that the U.S. is headed for one soon.
There are five publicly traded self-storage REITs, all of which have performed incredibly well over the past 25 years – coming in as the best-performing group in the REIT industry. Self-storage REITs have generated an average return of 18.86%, while the S&P 500 has returned 10.6% over the same time. The largest and most popular self-storage REIT is Public repository,(PSA 3.06%) which owns or has an interest in 2,600 facilities across the country.
Liz Brummer-Smith has positions at Mid-America Apartment. The Motley Fool has positions in and recommends Mid-America Apartment. The Motley Fool has a disclosure policy.