Concerned About Inflation? 6 Ways to Still Profit from Real Estate Investing

Over the course of the last 12-months, U.S consumer prices have climbed up to 6.2%; This is the highest 12-month increase since 1990. For consumers, this means that the cost of goods (e.g. food, clothing, gas) are at an all-time high.

For real estate investors, this means that the cost of construction, owning and operating existing properties, and financing real estate transactions will be on the rise. While this is the case, there are steps investors can take to ensure continued profits during periods of inflation.

ALSO READ: What is inflation?

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Rental real estate investors are in a unique position to financially prosper during periods of inflation. Rental real estate investors can increase renewal and lease rent rates for tenants, thereby staying ahead of the inflation curve.

Before using this strategy, you should note that there are jurisdictional statues that govern rent rate increases. While these statues exist, real estate investors hold the special privilege of raising rent and still earning a profit during periods of inflation.

Including a rent escalation clause in a commercial lease agreement is one sure-fire way to hedge against inflation. There are three general methods that can be used to increase rates with a rent escalation clause: fixed escalation, percentage escalation and consumer price index escalation (CPI).

CPI escalation is directly tied to inflation because the rent increases based on the consumer price index. When inflation is high, CPI escalation clauses can help landlords maximize their profits.

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The cost of operating a commercial building typically increases as inflation rises.

In commercial lease arrangements, tenants are typically responsible for their pro rata share (based on the square footage that the tenant occupies) of operating expenses.

To stay ahead of the curve and to ensure profits, landlords can increase the tenants' share of operating expenses. These expenses generally include real estate taxes, insurance, utilities and building maintenance. These expenses should be clearly identified in the lease and the lease should also contain an escalation clause. This will put the tenant on notice of potential rate hikes.

Purchasing a property can help investors to hedge against inflation. Investors can protect their money by capitalizing off of the current record low mortgage interest rates of 3.1% for a 30-year fixed rate mortgage, while also taking advantage of appreciation.

When the property is rented out or sold, the increased consumer cost can be shifted to either the tenant or the buyer, thereby ensuring that the investor earns a profit.

Additionally, by buying and simply holding the property, the property will appreciate and become more valuable over time. At present, the national average rate of appreciation rate is 2% month-over-month and 14.5% year-over-year.

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During periods of inflation, the cost to build new residential rental properties grows astronomically (e.g. the rising cost of lumber). This fuels the shortage of affordable and available housing to buy or rent.

These market conditions create a futile and profitable ground for investors. Investors have the opportunity to receive rental income (adjusted to inflation) and also enjoy the benefits of appreciation of property value .

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Real estate investors who have fixed-rate loan payments can continue to earn profits during periods of inflation.

Fixed-rate loan payments help investors to earn profits when adjustments are made to their operating expenses and to rental income. Investors with fixed-rate loan payments will have the same debt demands, but will have access to increased revenues, thereby increasing their overall profits.

ALSO READ. What Is a Fixed-Rate Personal Loan?

Inflation hits the entire market hard. Thankfully, investors can use real estate to win financially during periods of inflation.

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