You’ve probably heard that the U.S. is currently in a period of high inflation; or maybe you’ve noticed it on your weekly grocery bill. But what does that mean for your investments, especially in real assets like real estate?

Many people talk about using real estate as a hedge against inflation, while others warn against investing in real estate at all right now. It may seem strange that there can be such diametrically opposed opinions, but neither is completely wrong. Whether or not you should invest in real estate largely depends on your individual goals and expectations. 

If you’re investing to generate passive income in the near future, then inflation will affect you differently than if you’re investing with more long-term goals in mind, like creating wealth for your future retirement. So before you start deciding what you want to invest in, take a step back and make sure you’re focused on the goals that matter most to you. 

How is Inflation Affecting Real Estate in 2022?

The main drawback to investing in real estate right now is that the average real estate investment returns are not outweighing inflation rates. Real estate returns typically fall in the 7-8% range, and the annual inflation rate as of April was 8.3%.

Say you’re thinking about purchasing a single family home, for example. If your goal is to generate a monthly income for yourself by renting it out, then now is likely not the right time to invest. 

Even if the property is profitable, the cash flow it generates won’t really increase your wealth, it’ll essentially just replace the value of your money that’s lost to inflation.

How Will Inflation Affect Real Estate in the Future?

While real estate investments are not performing well in this high inflation period, we do still believe that real assets like real estate serve a purpose. In particular, investing in real estate can serve as a long-term wealth building strategy. 

If you purchase a property today and take out a mortgage, that mortgage is locked in at today’s interest rates. So, for example, if you borrow $100,000 at a 15-year fixed rate of 4%, you’ll continue paying that same 4% no matter how much inflation increases or what happens to interest rates. 

And because we know that inflation will continue over time (and rent will likely increase along with it), the amount of dollars you spend on your annual mortgage will have less value, and your profits will increase while your mortgage payment stays the same. 

Because of this, real assets like real estate do still offer unique investment advantages. But it’s important to know that those advantages will likely play out over a longer period of time.

If you’re preparing to invest in real estate right now, make sure you’re ready and willing to hold onto those assets for a long time, without seeing a significant return on your investment in the coming years. 

Investing During Periods of High Inflation

Fortunately for Accredited Investors, real estate is not the only way — or even necessarily the best way — to build wealth.

One of the easiest ways to make sure you’re investing for the future while also generating income in the short term is by structuring your portfolio to support and optimize your wealth building strategy. When you have reliable, passive income generating investments that don’t perform poorly in periods of high inflation, that can free you up to hold onto your real estate assets so they can appreciate over time. 

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Choose the Investments that Align with Your Goals

Think of your investments as vehicles that are taking you to the place you need to go. There are many different types of transportation, but different vehicles perform differently depending on the length of your trip and your end destination.

When you take the time to identify your end destination, and the possible roadblocks you may experience along the way, you’ll be better equipped to choose the investment vehicle that can help you get there. 

If you’re interested in learning more about the work First Generation Capital Partners can do to help you reach your goals, fill out this brief form to get in touch.