What is the Best Hedge Against Inflation? Is It Real Estate?

by | Dec 4, 2023 | Accredited Investor, BAM Blog, Blog, Real Estate Investing | 1 comment

Inflation is a term that is often thrown around in the world of finance and economics, but what does it really mean and how does it affect your investments?

First, let’s talk about inflation. This term refers to the general increase in prices of goods and services over time. This means that the purchasing power of your money decreases as prices rise. Inflation can have a significant impact on your investments, which is why it is important to understand how to protect your assets against it.

A hedge against inflation is an investment that can protect the decreased purchasing power of a currency that happens due to rising prices. When investors are looking for an inflation hedge, it means they want to invest in an asset that is expected to maintain or even increase its value over time. [1]

In this article, we will explore whether real estate is the best hedge against inflation and why it may be a smart investment choice.

What Does Hedging Against Inflation Mean?

Hedging against inflation refers to taking actions or investments that aim to protect the value of assets or finances from the erosion caused by rising inflation rates.

One common approach is investing in assets that historically have shown resilience or tend to increase in value during inflationary periods. Later on we will talk about a few examples and strategies you can try if you are interested in hedging against inflation.

Inflation hedging is a great way to protect the value of an investment. While some investments may seem to give decent returns, they can actually be sold at a loss when inflation is factored in. An example of this is if you invest in a stock that has a 5% return, but inflation is 6%, meaning you lost that 1%. [1]

How to Hedge Against Inflation

Hedging against inflation involves strategies that aim to protect your investments and assets from losing value due to rising prices. There are several ways to accomplish this.

For example, gold is widely considered an inflationary hedge due to the fact that its price in US dollars is variable. If inflation causes the dollar to lose value, gold tends to become more expensive. Someone who owns gold is therefore protected against a falling dollar. The investor may even be compensated for this inflation with more dollars for each ounce of gold. [1]

Another way to hedge against inflation is to invest in Treasury Inflation-Protected Securities (TIPS). These are bonds issued by the U.S. Treasury that adjust their principal value with inflation. They provide a guaranteed return above the rate of inflation.

Investing in the stock market is a good idea as well because these assets often retain or increase in value as prices rise. Since inflation causes your money to be worth less over time, it may be a good idea to keep some of your money in a liquid and easily accessible savings account. Other funds can go to the stock market to grow your money. While the stock market has historically experienced dips, it has also delivered returns that have beat inflation. [2]

Diversifying your investment portfolio across various asset classes can also help spread risk. A mix of stocks, bonds, real estate, and commodities can provide a buffer against inflation’s impact on any single asset class.

Should you choose to invest in the stock market, it is important to diversify your portfolio to lower the level of risk. Do not just invest in a handful of stocks. If the price drops or the company fails, you could lose substantial money. Diversification can offset the losses if one company performs poorly. [2]

Other inflation hedge options include floating-rate investments, inflation-adjusted annuities, and real estate.

Remember, each strategy carries its own risks and may not perfectly offset inflation’s effects. Your choice should align with your risk tolerance, investment goals, and financial situation. Consulting a financial advisor can provide personalized guidance tailored to your circumstances.

Hedge Against Inflation: Real Estate

Investing in real estate already comes with plenty of advantages. But serving as an inflation hedge is another one that needs to be mentioned. This asset class has intrinsic value and provides consistent income. Since there will always be a demand for homes regarding of the economic climate, real estate properties such as apartment communities are relatively safe investments even during economic downturns. [3]

If you own a rental property, you can charge tenants a monthly rent that can provide a steady stream of income. As inflation rises, so do property values. This income can help offset the effects of inflation, as you can increase the rent over time to keep up with rising costs. Real estate provides a source of income that can counteract the effects of inflation.

One of the main reasons why real estate is considered a good hedge against inflation is because it has the potential for asset appreciation. This means that the value of your property can increase over time, keeping pace with or even outpacing inflation. This is especially true in high-demand areas where property values tend to rise consistently. During inflationary periods, property values tend to increase, providing a hedge against the declining value of currency.

We mentioned that diversification is important, and real estate offers that as well. Investing in real estate can provide diversification in your investment portfolio. This means that you are not solely reliant on one type of investment, which can help mitigate risk. If one investment is not performing well, you may have other investments, such as real estate, that can help balance out your overall portfolio.

Real estate is also a physical asset, unlike stocks or bonds. This means its value isn’t solely reliant on market sentiment or inflation. It has inherent value, making it a potentially reliable hedge against inflationary pressures.

This can provide a sense of security during times of economic uncertainty, as the value of your property is not completely dependent on market fluctuations.

Do take note that because real estate is a tangible asset, it is illiquid. It is not easy to sell a real estate property quickly in case you need it. Some real estate experts would recommend real estate investment trusts (REITs), which are bought and sold easily in the markets. [3]

However, if you are an accredited investor, you may be more interested in multifamily syndication, which we will discuss below.

Other Considerations

It’s crucial to note that while real estate can be a hedge against inflation, it’s not foolproof. Real estate markets can be affected by various factors like interest rates, local economic conditions, and housing demand. Additionally, maintenance costs, property taxes, and potential vacancies can affect the overall return on investment.

The housing market is closely tied to inflation, as rising prices can lead to higher mortgage rates and housing costs. However, this does not necessarily mean that real estate is a bad investment during times of high inflation. In fact, the opposite may be true.

During periods of high inflation, the Federal Reserve may raise interest rates to try and slow down the economy. This can lead to higher mortgage rates, making it more expensive for people to buy homes. As a result, the demand for rental properties may increase, driving up rental prices and providing a steady stream of income for real estate investors.

Before making your investment in real estate, consider factors like location, maintenance and expenses, and market conditions.

The location of a property can greatly impact its potential for asset appreciation and rental income. Properties in high-demand areas, such as major cities or popular vacation destinations, may have a higher potential for growth and rental income. On the other hand, properties in less desirable areas may not see the same level of appreciation or demand.

Owning a rental property also comes with expenses, such as maintenance and repairs, so you need to be prepared. These costs can eat into your profits and should be factored into your investment decision.

Finally, like any investment, the real estate market can be affected by economic conditions. During times of economic downturn, prices may increase, but the demand for rental properties may decrease. It is important to consider the current market conditions and potential risks before making an investment.

Some aspects of inflation cannot just be avoided. However, real estate is a good way to potentially shield yourself from some of inflation’s other effects. [4]

What is Multifamily Syndication?

Now let us dive into one of the best inflation hedges in real estate, which is multifamily syndication.

A real estate syndication deal is the process of gathering capital from multiple investors. This group of investors is known as a “syndicate” and they take on a more passive role in the investment.

It is the syndicator who locates the investment property, puts the deal together, and executes the business plan. They look for investors who will provide most of the capital needed to purchase the real estate property in exchange for a share of the cash flow. The syndicator also handles property management once the deal is in place, making it a truly passive investment for real estate investors. [5]

This method allows individual investors to participate in larger real estate deals that they might not be able to afford or manage on their own. Generally speaking, large multifamily properties are too expensive for a lone investor as they can easily cost millions. But with a syndication deal, there are multiple investors pooling their resources together, so it is not as risky or expensive.

Syndication deals can be done with almost any type of real estate property. But because of the strong and consistent cash flow provided by multifamily properties, they are the most popular among investors. Multifamily properties like apartment communities also do not have to worry as much about vacancies. Having one or two units become vacant will not stop your cash flow, unlike with single family properties.

A syndication deal involves two parties: the syndicator who acts as the general partner (GP) and the investors who act as limited partners (LPs). These deals are often structured as limited liability companies (LLCs) or limited partnerships (LP). The general partners take an active role in the investment process. They provide disbursements to passive investors. They also keep them informed about the investment and manage the day-to-day operations of the multifamily property. [5]

The syndicator takes on most of the risk and liability of the deal, in exchange for additional fees and, depending on the property’s performance, a larger return on investment. Every deal is different, and the profit split will be detailed in the private placement memorandum (PPM). Investors get a share of the monthly cash flow, and depending on the deal structure, a share of the equity upon resale.

LPs do not actively participate in the real estate investment process. They are not legally or financially liable for anything involved with the syndication. Their only concern is the potential loss of their initial investment, should the investment not work out. [5]

This approach allows investors to diversify their portfolio by investing in real estate without the need for extensive knowledge or involvement in property management. It also provides an opportunity to access larger, potentially more profitable real estate deals than would typically be available to individual investors.

On top of all these benefits, multifamily syndication also serves as a great inflation hedge.

It’s important to note that investing in syndicated properties carries risks, such as market fluctuations, property management issues, and economic changes, so thorough research and understanding of the investment structure are crucial before participating.

Work With BAM Capital for Multifamily Syndication Deals in the Midwest Area

In conclusion, real estate can be a good hedge against inflation due to its potential for asset appreciation, rental income, and diversification in your investment portfolio. By understanding the potential risks and rewards, you can make an informed decision about whether real estate is the best hedge against inflation for your investment goals.

If you are an accredited investor looking to try multifamily syndication, you need to work with a syndicator you trust. Work with BAM Capital.

BAM Capital is a syndicator with a strong Midwest focus, prioritizing high quality multifamily properties with in-place cash flow and proven upside potential. This Indianapolis-based company is also vertically integrated, meaning they can handle every step of the syndication process, from locating the investment property to managing it. [6]

BAM Capital focuses on Class A, A-, and B++ properties and then uses their award-winning investment strategy to create forced appreciation while mitigating investor risk.

This syndicator has a proven track record for excellence and is considered a leader in their industry. In fact, BAM Capital now has over $700 million AUM and 5,000+ units. [6]

No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.

For accredited investors who want to enjoy the passive income and all the other benefits of being in a multifamily syndication, schedule a call with BAM Capital and invest today.



[1]: https://www.investopedia.com/terms/i/inflation-hedge.asp

[2]: https://www.forbes.com/advisor/investing/how-to-hedge-against-inflation/

[3]: https://www.investopedia.com/articles/investing/060916/top-5-ways-hedge-against-inflation.asp

[4]: https://www.forbes.com/sites/forbesrealestatecouncil/2021/09/28/is-real-estate-a-hedge-against-inflation/?sh=6a8eda6e19da

[5]: https://multifamilyrefinance.com/apartment-investing-blog/multifamily-syndication#important

[6]: https://capital.thebamcompanies.com/