How Do Inflation Affect Landlords and Real Estate Investors in 2023?
Several goods and services are becoming more expensive due to inflation, making it challenging for some people to purchase what they require. The rate of inflation has an impact on everyone, including investors and landlords. The influence of inflation on real estate also includes how many homes are available and how many people want them. Continue reading if you have questions regarding inflation and how it affects real estate. All you need to know about how landlords can deal with inflation will be covered in this blog.
What Is Inflation?
Inflation is the rate at which a good or service’s cost grows over time, often determined by year. Prices might vary depending on the circumstances, but inflation makes money more plentiful.
Generally, as more money becomes accessible, a dollar’s purchasing power declines, raising the cost of products and services. Sadly, most goods and services—including real estate—are impacted by inflation. Let’s now discuss a few of these causes and impacts.
Why does inflation occur?
There are a few ways the growth in the money supply might impact consumers, even though it ultimately leads to inflation.
With a demand-pull effect, for instance, a rise in the money supply leads to an increase in the overall demand for goods and services. In other words, higher spending and higher product demand result from having more money accessible.
The costlier creation of products and services can also contribute to inflation. As manufacturing a product is more expensive, the cost of the product also rises.
How Does Real Estate Influence Inflation?
There are several ways that inflation affects real estate. As an illustration, the cost of constructing a home rises dramatically due to increased salaries and more expensive supplies and materials. Finding affordable rental properties and growing rental enterprises have proven challenging for investors.
Borrowing money from the bank costs more when inflation drives up interest rates. This may lead to a decline in the number of investors who finance or buy rental properties. Yet, the rise in demand for rental properties has allowed present landlords to increase rent, leading to a crisis in the availability of affordable housing.
Nonetheless, investors have opportunities to invest during periods of high inflation. After all, the housing market and the area where the property is located greatly impact real estate investing. Let’s now discuss some advice for landlords on the impact of inflation on real estate.
The Impact of Inflation on Real Estate
Real estate has traditionally been regarded as a reliable inflation hedge because it prevents investments from losing value even when buying power declines. Several conditions, in addition to inflation, can be used to explain this:
1. Inflation rates have the potential to pay off existing obligations. Inflation-related income and salary increases are common. Under these circumstances, inflation benefits the borrower. This is because the debtor is still owed the same amount but now has more money from their salary to pay down the loan.
By definition, inflation causes a currency’s value to decrease over time. As a result, when a loan is made, the funds received today are replaced with funds earned afterward. In other words, the value of money now is far more profitable than its worth afterward. Because of this, borrowers must pay back lenders with money that is less valuable now than it was when the loan was made.
2. As a result of inflation, mortgage rates will increase. Everything will cost more in 2023 due to inflation, including mortgage rates. One impact of inflation rates on real estate is this. The main premise is that mortgages act similarly to bonds, requiring rising interest rates to keep investors interested in the market when inflation and purchasing power are falling. Inflation has a considerable impact on mortgage rates.
This results from the fact that the bond market sets mortgage interest rates. Inflation also reduces investor demand for mortgage-backed securities since investors frequently acquire and sell mortgages. Prices for mortgage-backed bonds decrease as demand declines. As a result, interest rates on all forms of mortgages are higher.
3. Inflation causes a significant increase in the price of construction equipment. Construction is another factor that inflation rates have an impact on real estate. The growth of the Nigerian economy has been significantly aided by the building industry and its operating procedures. The price increases for labor, machinery, and building equipment are heavily influenced by inflation, which results in a discrepancy between the initial budget and actual costs. Labor and material costs also impact inflation, but there is a big difference because of contractor and supplier margins. Economic expansion is risky due to the dynamic nature of construction costs, the price of construction equipment, and other factors.
4. Asset rate increases are linked to inflation. The expense of living increases in tandem with the price of real estate. In general, the cost of homes and other real estate assets rises along with inflation. Yet, a mortgage rise comes after a decline in real estate demand. This is a result of debt becoming more expensive. Hence, as demand declines, asset rate pressure to the downside increases.
5. During inflation, residential properties transcend. This is a huge bummer for investors who have invested in these assets. Economists believe that during periods of rapid inflation, residential and commercial real estate owners are often more prosperous than holders of stocks or bonds. Office, retail, and residential rents are frequently correlated with consumer prices and increase with inflation, which boosts property income. We’ve also talked about how inflation drives up the price of construction tools and machinery, which helps property owners by lowering competition from brand-new structures.
6. Rent prices have increased in pace with inflation. According to studies, fast-increasing periods of inflation resulted in a large jump in rent prices. As housing expenses are a sizable component of the overall inflation index, they continue to exert inflationary pressure even as interest rates lower inflation. There may be a time when rising mortgage rates make it difficult for renters to become homeowners, keeping the rental market tight.
How to Invest During Inflationary Peaks
It can be challenging to determine whether investments will be worthwhile when inflation rates are high, as they are currently in Nigeria. Even though mortgage rates are high, buying rental property might present several benefits. For instance, there is less likelihood of prolonged vacancies because demand is stronger than typical right now.
Landlords can adjust rental rates based on their properties’ location, additional facilities, and inflation rate to maximize their profits. Overall, because rental properties have the potential to appreciate, they often do well during inflationary periods.
Does Real Estate Have Inflation Protection?
Real estate can be utilized as a hedge against inflation. For instance, landlords might charge more for their houses while maintaining the same mortgage payment during strong inflation. As a result, landlords can make more money while others have to pay more for accommodation.
Also, house prices often increase over time so that investors can take benefit of this inflation influence on real estate. Let’s explore some other ways that real estate might stave off inflation.
The impact of inflation on debt: When home prices rise, the loan-to-value ratio of mortgage debt on real estate decreases. In other words, your mortgage payments stay the same but the equity in your rental property increases.
Property owners can increase their income by boosting costs, which allows investors with a portfolio of rental properties to profit. You put more money in your pocket, for instance, when you increase your monthly rent while maintaining the same mortgage payment.
Property values increase over time: Traditionally, property values tend to increase. Hence, despite inflation, the value of your home today may increase.
Inflation: Is This the Right Moment to Invest in Real Estate?
A successful rental business depends on making the proper real estate investments at the right time. We have seen progressively rising property prices over the last couple of years and a shortage of available properties for sale. Should investors buy property now, before prices increase much further?
The need for housing is constant. The option between renting and buying a home is currently difficult for first-time homebuyers. Regrettably, an overpriced market is pricing out many homeowners or making them lose out to the competition. As a result, there are now few vacancies and high rental rates, and the rental market is very robust.
It’s difficult to anticipate how the housing market will function through 2023, but many forecast rising demand and home prices. Investing in real estate now may present landlords with more chances down the road.
How Should Investors Be Ready to Buy Real Estate?
There are a few things to consider if you’re an investor wanting to buy more rental homes this year. Initially, it’s crucial to follow market trends and employ practical financial techniques. So let’s go through some steps to take this year before investing.
- Look at your financial situation. Taking a step back and assessing your finances before purchasing a rental property is important. It would help to thoroughly comprehend what you can afford and how much you need to save because purchasing a property is a significant investment. If you don’t arrange your investments properly, facing financial problems is simple. Fortunately, your local Lagos property management company may give you financial data for your rental properties if you own them there.
- Think about BRRRR Funding. BRRRR financing, which stands for “Buy, Remodel, Rent, Refinance, Repeat,” might offer investors the chance to create a strong rental portfolio. BRRRR financing is a terrific method to generate money while growing your rental business, but it requires time and effort.
- When You’re Ready, Purchase. Ultimately, making significant investments is crucial only when you’re prepared. Only allow someone to pressure you to buy real estate if you are in a position to do so. Instead, hold off on purchasing until you have a strong investing plan and are sure of your decision.
Property Management Can Help You Get the Most From Your Investment
It can take time for investors and property owners to navigate the effects of inflation on real estate. Investors may need help managing their rental businesses while comprehending the market and choosing when to buy. Fortunately, the property management company in your area is experienced and willing to assist you.
PlistHub can handle all your rental needs, no matter how many properties you own. Rent collection, tenant vetting, eviction services, and more are all things we can help with.
In conclusion, real estate investors can benefit greatly from an inflationary climate, provided they make wise purchases and assess their portfolios in light of inflationary pressures like rising interest rates. As no one can predict the future, well-informed real estate investors should be fully aware of how real estate inflation operates, how a rising inflation market affects your assets or debt, and the best method to manage risks connected with inflation.