How inflation affects investments and real estate (Podcast)

Inflation, investing, and real estate

Inflation is on the rise in the U.S. Earlier this summer, it actually hit its highest point since 2008. And according to the Bureau of Labor Statistics, inflation is expected to keep rising until at least January 2022.

Fortunately, there are ways to protect yourself against this loss of purchasing power and safeguard your wealth from inflation.

And buying real estate? That’s one of your best options.

Mortgage advisor Arjun Dhingra covered inflation and investing on a recent episode of The Mortgage Reports podcast. Here’s what you need to know.

Listen to Arjun on The Mortgage Reports Podcast!

What is inflation?

Inflation, at its simplest, is a decrease in purchasing power. It means the prices of goods and services are up, and that it takes more of your income to buy the same things than it did previously.

“The old expression that ‘$100 ain’t what it used to be’ definitely applies during inflationary times,” Dhingra explained on The Mortgage Reports Podcast.

“If you look at a bundle of goods, and what used to be purchased for $100, you’re probably noticing now that that same bundle of goods is more expensive, say to the tune of 110 or $112. That’s what inflation is,” he says.

Inflation rates in 2021

Inflation has increased steadily throughout 2021.

In January, the rate of inflation was just 1.7%. By April, it had inched up to 4.2%. And as of June’s Consumer Price Index, it was at 5.4% — the highest point since August 2008.

“If you’ve been out and about, you’ve experienced this inflation yourself,” Dhingra said.

“You’ve noticed when you filled up your gas tank recently, that it’s hitting your pocketbook a lot harder. Or when you’ve checked out at the grocery store, the bill is a lot more expensive.”

These higher prices make it easy to see the impact of inflation on your everyday spending.

But how does inflation affect your investments? And what can you do to protect yourself against it?

Hedging against inflation

Fortunately, there are ways to protect yourself against inflation — known as “hedging.”

When you hedge inflation, you invest your money into something that will either:

• Maintain its value during the period of inflation (and therefore prevent financial loss), or
• Increase in value during the inflationary period

According to Dhingra, there are three main vehicles you can use to hedge inflation: The stock market, bonds and hard assets (like gold), and real estate.

How inflation affects stocks and bonds

With stocks, there’s a lot of risk. While you could see your purchases increase in value, you could also lose money — and quite a bit of it.

As Dhingra put it, “The stock market can be volatile. So this may not be the best place to initially put your money if you don’t have the stomach for the roller coaster.”

Bonds and hard assets tend to be a steadier bet, and as Dhingra calls them “more conservative.”

Still, they can work as a solid hedge. “They maybe don’t grow at such an aggressive rate and can oftentimes be referred to as your grandfather’s investments,” Dhingra said.

How inflation affects real estate

According to Dhingra, real estate is often your best choice if you want to protect yourself against inflation.

“Real estate, as an asset class, has always hedged and performed well against inflation, historically speaking,” he said.

“That’s because you’ve got three huge benefits when putting money into real estate: appreciation, amortization, and taxes.”

Let’s look at these three perks a bit more in-depth.

Appreciation

Appreciation is when an asset rises in value — something housing has done considerably in recent years.

In fact, according to the Federal Housing Finance Agency, home prices were up a whopping 18% between May 2020 and May 2021.

“Appreciation has definitely been one of the biggest advantages to owning real estate as of late,” Dhingra said on the podcast.

“You’ve got annual appreciation rates that in most markets are doubling, if not tripling, the rate of inflation. So this asset that you put your money into is going to increase in value,” he explained.

Plus, the rate at which most homes are increasing in value far exceeds the interest rates on most home loans.

That means many homeowners will see a bigger return — in the form of equity — than what they’re paying to borrow money.

Amortization

If you mortgage your real estate purchase, then that cost is amortized — meaning you get to spread the costs out over time, build your wealth, and lower your costs month after month, year after year.

That’s not a perk you get with other arrangements (i.e. renting).

As Dhingra explained, “You get to cut yourself a check now instead of your landlord, so you’re paying down your own mortgage and your own balance and not someone else’s.”

Taxes

Finally, there can also be tax benefits to investing in real estate.

In many cases, mortgage interest is deductible. As long as you itemize your returns, you should be able to write off the money you spent on interest across the year — as well as any interest on home equity loans or HELOCs (assuming those funds were used on renovations).

If you just applied for your mortgage within the last year, you can also write off the mortgage interest and points paid at closing.

“The annual amount of interest that you pay on this mortgage, you will get back in the way of a refund or helping offset some of your tax burden,” Dhingra said.

Note: This site does not offer tax advice. For more information and advice for your situation, speak with a tax professional or financial advisor. 

Are you considering buying real estate?

If you do choose to hedge inflation by investing in a home or piece of real estate, Dhingra says it’s vital you reach out to an experienced financial or mortgage advisor. They can help you pinpoint the best mortgage product for your goals — and your long-term wealth.

You can get started right here.