What Does Inflation Mean for Investors in 2024?

Inflation, the term used to describe the rise in the general price level of goods and services over time, can have far-reaching consequences for consumers and investors alike. In February, the inflation rate failed to fall below 3%. While inflation has slowly decreased over the last year, it has yet to drop to the Federal Reserve’s target figure of 2%, indicating that the pandemic-fueled inflation of the last few years is here to stay for 2024. Whenever the market enters a time of change, it can be tempting as an investor to react in the short term rather than to implement longer-term strategies that may ultimately end up being more lucrative. However, as a real estate investor, there are a few ways you can actually use this volatility to your advantage.

In this article we will explore the intricate relationship between inflation and real estate investment, what investors need to be wary of, how to remain proactive, and what unique opportunities investors can take advantage of during times of inflation.

Inflation is a dynamic force triggered by various factors, such as increased production costs or an excess supply of money in the economy. This force shapes our economy, with far-reaching effects on the stock market, consumer spending, the availability of resources, and housing prices. It can also provide important insight for investors. We can analyze the pattern of inflation with historical data, which indicates periods of rapid price increases are followed by periods of stabilization. In layman terms: Inflation doesn’t last forever. If you invest in real estate as a hedge against inflation, then you can strategically leverage that inflationary window of time to your benefit.

During periods of inflation, we tend to see an increase in real estate value, increase in rents and home prices, increase in mortgage rates, depreciation of debt, an influx of renters in the market, a rental housing shortage, and higher property value. Sure, there are factors such as increased asset prices, like inflated construction costs, but overall, real estate investors (those who own either residential or commercial real estate properties which generate cash flow) who are prepared to handle risk are prepared to benefit from inflation in the real estate market. (The same does not apply to homeowners who do not own rental properties.) In the below sections we will explore why inflation causes these phenomena and how you can use it to your advantage. 

Property and home values typically appreciate during inflation, due to an increased demand for real estate assets. With the upfront costs of purchasing a home being significantly higher than renting between the down payment and higher interest rates, we are seeing an increase in renters hit the market, boosting the demand for rental housing supply. The surge in demand coincides with a surge in property value, because when you have more demand from would-be first-time homebuyers renting instead and less available rental housing inventory, you naturally see the value of that asset increase.

Rents must increase to keep up with inflation, especially since the cost of management for your property will undoubtedly increase as well. Inflation erodes the purchasing power of money over time. When you raise your rent slightly above the inflation rate, you can preserve the return on your investment, offset the increased operating costs, align with market rates, ensure adequate cash flow, and maintain property value.

With inflation comes the decrease of the dollar in value. When your interest rate on your asset or debt remains the same, but the value of money decreases, your current debt essentially becomes cheaper. Because of this, real estate investment can be a good hedge against inflation.

Because real estate is a tangible asset that does well during inflation, adding a real estate investment to your portfolio can provide protection during inflationary periods. Whether you already own assets in real estate and want to expand, or you are considering investing to have a hedge against inflation, the market’s trajectory is strong for 2024.

Construction costs, energy bills, and property taxes are just some of the costs associated with property management — all of which can and oftentimes do see an increase in cost during inflation. Increased costs of materials can make managing your asset more difficult, but it can also work in your favor.

As discussed earlier, increasing your rents above the inflation rate offsets the inflated costs of property maintenance and management, plus keeps your asset working for you in terms of cash flow. With the increased construction costs comes a slowdown in new construction builds for commercial rental properties and residential homes — and with less property inventory, you have less competition and an increased demand in the housing market.

According to the Fed, inflation is here to stay in 2024. Real estate investors are presented with a unique set of opportunities during periods of high inflation that can outweigh the associated risks. Armed with the knowledge and strategies to navigate the complexities of the American housing market, real estate investors hold the most opportunity to benefit from times of inflation. The multifaceted impact inflation has on assets allows investors to position themselves for long-term success.

Remaining adaptable, informed, and proactive is key to your real estate investments thriving amid the ever-changing landscape of inflation and real estate. Inflation can of course pose challenges, but understanding how to leverage its dynamics can allow real estate investors to turn economic uncertainties into strategic advantages.