Greetings Real Estate Investors!
Welcome back to our third and final installment of “Reasons to Invest in Real Estate”. In the first two articles we discussed the concept of Passive Residual Income and then got into the philosophical importance of leaving behind assets to our children and grandchildren. In this article we are going to get a bit more technical and discuss why Real Estate is considered an excellent hedge against inflation. Now if you are not into economics the concepts of hedging and inflation may sound a bit foreign, but if you are going to be a successful investor, both in real estate and other instruments then you must understand these concepts.
Lets Start With The Basics
If you remember from your high school economics course Inflation is basically the process of devaluation of a currency in relation to the goods and services in that economy. So in the simplest possible terms it’s why everything always seems to cost more every year. Of course that is an oversimplification because there are numerous factors that come into play when pricing goods but for the most part all are affected by inflation in some way. The main barometer for these increases is the CPI (Consumer Price Index) that takes an average of items that most households regularly purchase and tracks their movement. As you can see from the chart below prices have increased every year since the 1900’s, in some years more than others. So your money is becoming worth less, not worthless, that would be a huge problem. But inflation is still a minor problem especially if you have investments.
Don’t Trim Your Hedge…Against Inflation
So what is a hedge? Think about your neighbor and how he always wants to talk to you. If you have a small hedge your neighbor can always bother you when you get home, he wants to talk about the game and what kind of fertilizer you are using. But if you have a big hedge than you can avoid him, even he says hi it is muffled and you can even pretend you never saw him. So that’s how real estate works as a hedge against inflation. Even though you may still deal with some of the minimized effects, for the most part your property will keep pace with inflation and thereby strengthen your asset portfolio.
Why Real Estate?
The reason that real estate works so well is that it is so tightly paired with the previously mentioned CPI. To put it simply, because so much of what a family buys to live is involved with their home the value of a home tends to increase proportionally with the value of the goods and services purchased to live in the home. To put it another way, if you have an investment in Apple their products are very loosely tied to the overall costs of goods and services in the economy. In fact we use that example because Apple (and similar tech stocks) could actually be inversely proportional to inflation since when other stuff costs more families are less likely to purchase expensive tech items. But people will always need a place to live!
We hope this has helped understand the third and most technical reason to invest in real estate, there are surely numerous other reasons but we feel that these are the most compelling. If you are interested in purchasing investment real estate we can point in the right direction. And then once you own (or if you are already an investor) make sure to boost your bottom line by choosing the best property management company…we happen to know the best one!
Happy investing see you next week!
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