At 7.9% (as of February 2022), U.S consumers face the highest inflation rate since Queen and David Bowie released their Top 10 hit, Under Pressure. Like the 1981 hit title suggests, high net worth investors are under pressure to find investing safe havens to hedge against inflation.
And there’s a good reason for this. Recent statistics show that 85% of large-cap funds underperformed in the last ten years. With such a poor track record, these funds can quickly lose appeal as a safe investment option in a high-inflation economy with such a poor track record.
So what alternative investments can investors consider? Experts agree that portfolio diversification is key to keeping assets protected during inflation. For this reason, a growing number of investors are diversifying towards real estate as a hedge against inflation. This renewed interest in real estate partly results from these assets' relative immunity compared to the performance of stocks and bonds. Added to this is the potential for real estate assets to generate steady cash flow without significant devaluation.
This article will discuss how investors can protect their assets from inflation by building wealth through real estate.
Table of Contents
- Why do investors consider real estate a hedge against inflation?
- How to build wealth through real estate
- Passive vs. Active investing
- Best way to build wealth with real estate: active investing with passive management
- Build wealth in real estate with strategic partnerships
- Why build an alliance with a real estate partner?
Why do investors consider real estate a hedge against inflation?
As a basic human need, shelter will always be in demand. Perhaps this is partly why investors have historically favored real estate over other securities as an effective hedge against inflation.
But demand alone is not enough to justify the choice of real estate as a suitable hedge against inflation. The cost of living increases during high inflationary periods, and so does the cost of building materials and, subsequently, construction projects. Increased construction costs mean fewer new building projects and higher demand for existing properties.
Increased demand raises tenant rents - and rental income for property investors. This is good news for investors, as this increased rental income represents a higher gross revenue that usually outpaces expenses that don’t track inflation. The typical outcome for investors playing in this environment includes a higher NOI (Net Operating Income), increased cash flow, and higher overall property values.
Additionally, the value of real estate assets is conventionally represented using inflatable currency. So when inflation is high, the value of the real estate asset is preserved but not the currency through which the valuation is defined - dollars. With dollars being worth less during inflation, the same property would demand more dollars to acquire. At the same time, its intrinsic value (which can be increased through value-add activities - but that's a story for later) remains the same.
For these reasons, commercial real estate assets that generate cash flow (like multifamily apartment units, for example) can prove very lucrative for investors in periods of high inflation.
Image Source: BlackRock
A recent study by the asset manager, BlackRock, measured the average returns in different instances over 20 years. The findings suggested that the total returns on privately-owned property assets outperformed those on main stock and bond indices when inflation was higher than 2.5%.
Experts maintain that increases in the value of real estate assets have historically coincided with rising inflation. While investing in real estate comes with pros and cons, property values generally maintain a steady upward curve regardless of the consumer price index - making them an excellent hedge against inflation.
How to build wealth with commercial real estate in a high-inflation economy
For investors looking to use real estate to hedge against inflation, the best way to build wealth with real estate is to diversify your portfolio and start earning diversified income with an experienced strategic partner like CURATED. Read on to find out how this works.
In the real estate industry, wealth is built in 2 primary ways:
- Appreciation: the increase in the value of the property over time.
- Rental income: the cash flow generated from renting the property to tenants (this also forces the property's value to increase).
A significant portion of real estate wealth is built from appreciation, including natural appreciation over time and forced equity appreciation through increasing NOI. However, a significant number of real estate investors are cash flow investors who are also interested in assets that produce cash flow while they sleep. As appreciation and rental income (cash flow) historically increase during inflationary periods, real estate assets offer investors the sweet spot between long-term appreciation and short-term yield.
Which approach? - Active or Passive real estate investing
When it comes to the mechanics of investing to hedge against inflation, there is a difference in opinion among experts on the best route to take - passive or active investing.
Both passive and active investing are essential aspects of real estate investing. Some investors enjoy the reduced time demands and scalability that passive investing offers, while others want the control that active investing allows. Before deciding on the most appealing approach, it is crucial to understand the differences between passive and active real estate investing.
Passive real estate investing.
Passive real estate investments do not demand direct involvement in the construction or development of the property. In this model, investors commit funds to real estate assets without playing an active role in day-to-day operations.
Investors who prefer this approach will likely favor passive investment strategies with long-term property holds such as REITs (Real Estate Investment Trusts) or done-for-you acquisition and asset management services.
Active real estate investing.
Active investing on the other hand involves property acquisition as well as full participation in the construction, supervision, and direct management of the property.
Active investors aim to maximize profit from these asset classes in the short term.
Investors who prefer this method will most likely favor opportunities like fix-and-flip investments, for example. Here, run-down properties are acquired at a discount, renovated by the investors, and then re-sold at a profit. While these investors may commit to active investing in the long-term, they are usually confined to smaller properties because of the capital requirements required to get into larger, more profitable complexes.
Active real estate investing vs Passive real estate investing.
Time commitment. Active real estate investing demands the full attention and time of the investor, while passive investing requires significantly less commitment. Investors looking to maintain a diversified portfolio will probably not have the luxury of time to commit to daily operations that active investing demands. Passive investing is what they call ‘mailbox money’. As an investor, your work involves walking to the mailbox to get your check to cash.
Research commitment. When investing with an experienced partner with a proven track record, passive investing often requires less demanding due diligence. Active investors, on the other hand, need knowledge, experience, highly-demanding due diligence, and active research to succeed.
Time to profitability. Passive investing is best for investors that prefer long-term profitability and an overall profitable investment portfolio. On the other hand, active investing favors those who prefer short-term gains.
Best way to build wealth with real estate: active investing with passive management
The best way to build wealth during inflation is to combine the profitability of active investing with the scale and reduced workload that passive investing offers.
For example, CURATED.’s hybrid model combines the profitability of active investing in fix-and-flip style assets with the benefits of passive management to build wealth for its accredited investors.
In this model, all the time/research commitment of active investing involved in scouting properties, appraisals, renovation quotes, crunching financial feasibility numbers, acquisition, operations, etc. still applies. The difference is that here, CURATED. takes over the heavy lifting and executes a powerful 4-step revenue generation model discussed below.
CURATED. also provides the scale and diversity of income streams by enabling investors to invest in larger multifamily assets instead of single-family homes or small multifamily properties.
- Deal Pipeline:
Deal Pipeline lies at the foundation of every real estate investment strategy. Real estate investors differ on their preferred revenue-generating assets - some prefer to invest in newly developed properties, while others like CURATED. scout for underperforming assets in upcoming locations.
Location is a critical component of a profitable investment, especially for commercial real estate investment models that rely on high occupancy rates and strong demand to maximize their overall ROI. In the current market, deals are hard to come by - so great investors are defined by a robust pipeline like CURATED.’s that gives them access to both off and on-market deals.
Real estate acquisitions require significant investment in time, energy, and sheer vigilance to acquire and exit properties. A considerable amount of due diligence is needed for a successful purchase. From lease audits to physical due diligence to financial due diligence, the process involves countless professionals to perform well. To streamline the overwhelming process, investors need to have an organized system and a DD (Due Diligence) strategy to perform DD efficiently and thoroughly once the process kicks off. CURATED.’s investors are relieved of this burden, however, only having to deal with progress updates from a highly organized system.
- Add Value:
A value-add strategy is best suited for investors who value great returns with minimal risk. Here, underperforming properties are acquired and upgraded strategically to increase their overall values. For example, CURATED. acquires Class B and Class C multi-family units in need of attention, renovates them and adds additional facilities to increase their market value immediately. In the right market, a value-add investment strategy offers higher returns and a healthy ROI either from the sale of the property or from increasing rents - with the latter generating additional cash flow for the investor.
- Return Capital by Refinancing or Exit
Refinancing is one of the best ways to release capital on a real estate asset without disposing of it. By refinancing an investment property, investors can build long-term wealth by returning capital while still generating income. They then can take the returned capital to rinse and repeat the whole process by investing in other properties.
While we’re largely long-term investors at CURATED., there are isolated instances where an exit might be more financially viable than refinancing. One example is when a property gains a significantly higher valuation after a value-add exercise of quality upgrades and higher rents. The resulting significant equity gain makes an exit more attractive than a refinance.
Build wealth in real estate with strategic partnerships
In the bid to diversify their portfolios to include real estate assets, investors often realize that they cannot do it all themselves.
In a recent survey by Deloitte, most corporate strategy executives cited strategic alliances as fundamental to their revenue generation and pandemic recovery efforts. Strategic alliances for these executives offered access to the capabilities needed to optimize revenue generation in the face of uncertain market conditions.
What is true for the corporate strategy executive also holds true for the real estate investor. Strategic alliances for real estate investors offer access to key capabilities needed to optimize both short-term revenue generation and long-term wealth building.
A strategic real estate investment partner collaborates with an investor to access unique opportunities, teams, brokerages - or other strategic resources. This partner provides a one-stop-shop style solution for all the services and contacts that the investor is likely to need during their wealth-building journey. The importance of a strategic real estate investment partner lies in the need for a robust management system for acquisitions and ongoing management - especially for investors looking to maximize cash flow without sacrificing yield.
Why build an alliance with a real estate General Partner?
A General Partner or “sponsor” provides a private equity placement opportunity for individual investors, family offices, and institutions. Apart from significantly reducing the time taken to generate returns on real estate investments, strategic real estate General Partners bring a lot to the table.
Real estate General Partners have the experience and knowledge to help you make informed decisions about your investment.
Most real estate General Partners offer a hassle-free experience, handling the heavy lifting associated with all the paperwork and legwork involved in buying, selling, and managing properties.
By leveraging partner networks, real estate investors gain access to unique acquisition opportunities, experienced management teams, financing solutions, and more.
If you’re an accredited investor looking to diversify your portfolio and realize a healthy ROI without taking on considerable risk, a strategic partnership with a professional General Partner is the way to reach your financial goals and build wealth over time.
The bottom line
In an inflationary environment, real estate creates wealth and protects your capital from the deteriorating effects of inflation. The best way to invest in real estate, especially as a busy investor is by executing a combined strategy of active investing and passive management, with the help of an experienced real estate General Partner.
A partner like CURATED. has a great track record of generating excellent ROI for their investor partners. Our lucrative investment strategy and experienced team of executors, CURATED. offers the ideal solution for real estate investors looking to build wealth with a reduced risk strategy.