The Azucena Take: The Effect of Inflation and the Investment Real Estate Market

One of the biggest topics that have recently concerned investors is the spike in inflation. Many are asking how concerned we should be and how it will impact their investments or livelihood. Inflation is a serious topic but you shouldn't expect doom and gloom around the corner.

Thankfully, there are real experts with solid insights who understand the market and could provide a more insightful understanding than Chad on Twitter.

First, it’s important to understand what is causing the current uptick in inflation. There are two factors at play, the surge of cash entering the market and supply failing to meet demand.

When the pandemic hit, everything came to a halt and that includes the manufacturing of most goods. At the same time, people were forced to shelter themselves and limit their activities (thus having to save money). With the economic support of the third stimulus and the rise of a vaccinated population, life is returning to normal while people have money to spend on goods and services.

Unfortunately, supply is having a hard time keeping up with demand as the manufacturing industry is just starting to get production back up to speed. Such inflation was anticipated and it’s expected that this will be a short-term problem as manufacturing starts to meet consumer demand.

One just needs to look at the correlation between retail sales and manufacturing. As sales are skyrocketing, demand is slowly trying to keep up. It will take some time, but retail sales and manufacturing should be in alignment sometime in the next few months.

So what does this mean for investment real estate? Traditionally, this has been one of the best investments to hedge against inflation. Currently, the hit on supply has also resulted in fewer houses being built and thus creating a seller's market. As a result, there is still a huge demand for apartments and the cost of rent has always been aligned with inflation. Most leasing agreements will have a clause that ties the rent to several inflation measures.

Given that inflation drives up rent, it also results in raising the value of the property. For owners of investment properties, this means their investments are safe from the harms of inflation while also in a good position should they want to diversify their investments.

While inflation might be on the rise, it’s going to be a temporary problem. At the same time, it will be a rewarding moment for those who have investment properties in their portfolio.