How Income Generating Real Estate Can Help Hedge Against Inflation

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Written By Adeyemi Adetilewa

Investing in real estate is one of the safest long-term investments you can ever have. Whether residential or commercial properties, it can be an income-generating venture and also serve as a hedge against inflation.

For example, as the need for homes keeps increasing, you can invest in such properties and give them out for rent or sell them for profit. 

In addition, new businesses keep cropping up, raising the need for commercial properties like warehouses, stores, and office complexes. Companies looking for office space for rent in Phoenix and the surrounding areas would want to rely on available spaces rather than trying to build one.

Having such property in a prime location is a tremendous income-generating real estate investment. So what is an income-generating property?

What Is Income-Generating Real Estate?

What Is Income-Generating Real Estate? 

An income-generating real estate is a property that brings you money through resale, rent or lease payments, or market price appreciation. Income-producing property can be residential or commercial; it can be a newly developed property; or buy, renovate and sell/lease out old properties.

Considering how saturated the real estate market is, you need to be tactful and seek professional advice before investing in any real estate asset.

Like any other investment, real estate investment also has risk. Investors need to consider factors including location, demand, the economy of the area, and budget, among others, before making a move. 

Type of Income-Generating Real Estate Investments

Investors can venture into the real estate industry actively or passively. 

Active real estate investment

In active investment, the investor develops/purchases a property and manages it alone. It could be giving the property out for rent, or buying, renovating, and selling. 

i). Rental Properties

Rental properties remain one of the best long-term real estate investments. Here the investor can buy or develop residential properties, office complexes, shopping centres, etc., then lease or rent them out.

The investor is assured of getting tenants’ monthly or yearly rent payments, but be ready for drama sometimes. Some tenants can be troublesome and challenging to manage. 

ii). Buying and selling real estate

This involves an investor buying a home at an affordable price and putting it back on the market to sell at an increased price. Or, the investor renovates/upgrades a house and sells it for profit.

It would help if you had time, patience, and knowledge in the real estate market to succeed.

Passive Real Estate Investments

Passive Real Estate Investments

With passive real estate investment, the investors don’t require direct involvement in real estate property management. It comes in different forms, including investing in existing real estate portfolios like

i). Real Estate Investment Group 

Real estate investment groups (REIG) focus primarily on real estate investments. The group buys, renovates, resells, manages rental properties, and finances new properties.

REIG syndicates invest mainly in multi-unit properties, including condominiums and townhouses. They later sell shares/units of these properties to investors, which they also manage on behalf of the investors. Investing in such a venture can earn you steady dividends. 

ii). Real Estate Investment Trusts (REITs)

Real estate investment trust (REITs) is one of the surest bets for investors seeking to diversify their portfolios from stock and bonds.

REIT is lucrative for its long-term investment benefits and dividends. REIT is a form of real estate investment where a trust or a corporation uses money invested by individuals to purchase and operate properties. Just like stocks, you can buy REITs on various exchanges.

iii). House Flipping

House flipping is more of a buy-and-sell style of real estate investment. The investor hunts for undervalued properties and buys them not for use or rent but instead to resell them when the market is good.

Such investors hardly renovate or improve the property they buy. They just keep it as it is, study the real estate market, and sell it to a new buyer when the outlook is good. You need some experience to succeed in this real estate market.

How Income-Generating Real Estate Property Can Help Hedge Against Inflation

How Income-Generating Real Estate Property Can Help Hedge Against Inflation 

The rise in inflation causes money to devalue as the purchasing power of a currency declines. Currently, the US inflation rate is hovering around 6 per cent. With this, prices of goods and services rise, and you need more money to buy the same quantity of goods. 

This is what happens to other financial investments. Although financial institutions sometimes raise interest rates to curb inflation effects on investments and savings, it doesn’t shield them completely. This causes financial investments like pension funds, treasury bills, savings, etc., to all decrease in value.

For example, an investment of $200,000 at a 5 per cent interest rate during a time when inflation was 2 per cent will now devalue with the current interest rate. Unless the bank raises the interest rate, you are losing 1 per cent of your principal to inflation. This is the same for other financial investments, including retirement funds like IRA and 401(K).

It is therefore critical to diversify your investments to include others like real estate to help hedge against inflation. Unlike stocks, bonds developing/buying and adequately managing real estate investment can increase the value of your principal investment despite an inflation surge. 

When inflation causes price hikes, property value also increases; hence, it cushions your investment from devaluing. In addition, the prices of properties rise in value depending on demand, supply, and season. Whenever the prices go up, it is a win for you.

Long-term high inflation can turn things south if you plan to finance your retirement with an investment or savings. However, the results would be different if you were to invest in real estate within that period.

Is an income-generating property a good hedge against inflation?

A strategic and well-planned real estate investment doesn’t only earn you a steady income but also protects your investment value. Your investment is practically shielded from the troubles of inflation as you enjoy some excellent dividends.

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