A recent government report has revealed that the US is currently facing a 40-year-high inflation rate up a whopping 9.1% since last year led by increased prices of gasoline, food, and housing. This has resulted in consumer confidence hitting rock bottom. As consumers strive to cope with the negative effects of soaring inflation, some savvy investors see real assets as a form of hedge, or protection, against it. In this article, let’s understand more about these types of investments, which are worth venturing into, and why they are immune to inflation.
What are real assets?
Infrastructure, natural resources, and real estate are the main types of real assets. They are tangible resources that have a value connected to their ability to produce goods or services. Some consider these assets as “things that make the world tick” for they often have a good long-term value.
Compared to financial assets, real assets are more stable but less liquid. Real assets can contribute to a diverse portfolio as they often have opposite movement to financial assets like stocks and bonds. But, the question remains as to how these real assets work as an inflation hedge.
Infrastructure
Real assets in infrastructure include electricity, gas, water, bridges, tunnels, and roads. These are highly regulated assets, which makes them hard to penetrate as they benefit from unbending demands. Infrastructure investments can pass increased pricing on to their customers. This includes a price hike caused by inflation.
For example, investments that are affected by an increase in gasoline prices have the liberty to pass those additional costs on to their consumers, keeping cash flow stable even in a very unpredictable market.
Natural resources/commodities
This type of real asset is commonly used as a means for the production of other goods. Examples of these resources are natural gas, oil, cotton, corn, wheat, soybeans, and high-end metals like gold and silver.
Now, these commodities are considered inflation-hedging assets because of their relationship to the broader market. A rise in inflation tends to reflect in the prices of these raw materials. This claim has been very much visible this year in the United States. From January to June, the price of crude oil has already ballooned by 41%. The same goes with soybeans and wheat, whose prices increased by 12% and 10%, respectively, within the same period. This data alone suggests that investing in natural resources could be advantageous for investors as they demonstrate immunization from the high inflation rate.
Real estate
The most impactful way to protect yourself from the high inflation rate with real estate investment is converting your property into a rental home. This presents an opportunity to generate income because, like commodities, the rental price reacts to the inflation rate. According to Forbes, the one thing that can keep up with inflation, and even exceed it, is rental income. As inflation soars, rent tends to spike as well.
Yet, this kind of investment requires a lot of research and many hours of work to bring profit. Venturing into real estate properties is much riskier compared to other forms of investments. You will be spending loads of money not only on buying a property but also on renovations to make it rent-ready. So, one must be willing to put in the work and be well-informed, or else face the risk of losses. One thing to know is how to assess potential rental properties. This increases the chance of your property performing well and bringing in a positive cash flow.
If rental management is not your scene, another option is buying into a real estate investment trust or exchange-traded fund. This lets you participate in the real estate yields without actually owning a property.
Is it still worth it to invest in rental properties?
Applying the buy-low, sell-high principle, one might wonder whether the inflation rate has already peaked. If it has and would soon slowly decline, there is a possibility that rental prices might follow. With the high volume of investors now going in on rental properties, new investors would then be trapped in an industry with high supply but lesser demand. If that were the case, then units could have longer vacancies and owners would be forced to spend more on maintenance and resident screening.
To the question of whether or not the spike in the inflation rate has already reached its peak, there is really no way to answer that because many factors are at play. We have seen rent prices coming down in the past month. However, according to experts, this trend might not last long. A recent report even suggested that in May 2023, price growth would be up by 8.4% as compared to only 5.8% in June 2022.
Up next: Rent hikes 101: How much to increase rent per year
These statistics indicate that, similar to other businesses, investing in rental properties comes with risks. Yet, it is worth noting that today’s mortgage rates and home prices make renting more practical than buying. So, as Americans try to look for their own places post-pandemic, the demand for rentals is unlikely to decrease soon.
Conclusion
The high inflation rate is all over the news and all of us are undeniably affected. From our daily commodities to the services we like to receive, prices have significantly increased. For investors, an inflation hedge in the form of real assets has given them the opportunity to invest without exposing themselves to more risks and huge losses. Infrastructure, natural resources, and real estate—all project a positive cash flow because of their relationship to the inflation rate. If you intend to invest in a real asset, make sure to know the intricacies first, and consider speaking to a professional advisor.
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