Hedge Against Inflation With These 3 Real Estate Investment Types
Canada is currently experiencing inflation of 5.1%, the highest the country has seen in three decades. So whether you're working a desk job, working in the services industry, or even doing manual labour, the spending power of your Canadian dollar has drastically reduced.
Economists predict inflationary impacts, such as higher prices, to persist. Fortunately, real estate investment can help alleviate some of the financial stress.
Here's everything you need to know about inflation, including how it affects you and how a real estate may help.
What Is Inflation, And Why Does It Affect My Purchasing Power?
Inflation is defined as a decrease in the purchasing power of money. Prices for products and services grow when the rate of inflation rises. As a result, a dollar gets you a little less with each coming day.
The consumer price index, or CPI, is a widely used inflation indicator. According to the most recent CPI data, prices jumped 5.1 percent from January 2021 to January 2022. The CPI from January 2020 to January 2021 only climbed by around 1 percent.
So how does inflation impact your purchasing power? Let's find out:
Lower Purchasing Power
As we have previously mentioned, when the prices of goods and services rise, the amount your dollar you could purchase will not be as much as it once was. For example, if a particular coat were 45 CAD before inflation, it would now cost around 47.295 CAD, which means that 45 of your dollars will no longer be able to purchase the coat.
Higher Borrowing Costs
The Bank of Canada is likely to hike interest rates to combat inflation.
As a result, customers are more likely to pay higher interest rates on loans such as mortgages and credit cards.
Lower Standards of Living
Wage increases typically lag after price hikes. Even while there are still labour shortages in Canada, which would typically result in pay increases, wages are not rising at the same rate as inflation. As a result, everyone's life is becoming less affordable. Inflation, for example, can require those on a fixed income, such as pensioners, to adjust their lifestyles and prioritize necessities.
Erosion of the Value of Money Saved
Inflation is considerably more detrimental if you keep all of your savings in a bank account. The national median deposit rate of interest for a savings account was roughly 0.067 percent in February 2022, which was nowhere near enough to keep pace with inflation.
Finding a place to put your money besides the bank is one of the best strategies to mitigate these consequences. Even if interest rates rise, they are unlikely to climb high enough to keep inflation. If you have cash on hand, your money's worth will depreciate year after year and at a faster rate in years when inflation is high.
Real Estate Can Act As a Hedge against Inflation
So, where should you put your money to protect hedge against inflation effects? Financial consultants have typically recommended several investment vehicles, including:
As a primary inflation hedge, some people invest in stocks. However, as we've seen in recent weeks, the stock market may become unstable amid inflationary periods.
Commodities, such as gold, oil, and animals, are tangible assets. At the same time, it makes sense to believe that commodity prices should rise in tandem with inflation. However, researches demonstrate that this link isn't always present.
Real Return Bonds (RRBs) are Canadian government-issued inflation-protected bonds adjusted to the rate of inflation. Bonds are deemed low-risk assets, but their returns have not kept pace with inflation, making unsatisfactory investments.
Real estate prices tend to climb in lockstep with inflation, so much Canadian money is pouring into the market right now.
We believe that real estate is the best inflation hedges. Real estate ownership can do more than preserve your wealth; it can also help you create money. For example, housing prices increased by 20% from 2021 to 2022, approximately 15% faster than inflation, which was 5.1 percent.
Furthermore, certain real estate investments can assist you in generating a source of passive income. Property owners avoided the decline of buying power caused by inflation last year; they also gained ground.
Investment Types in Real Estate
Even though there are several ways to invest in real estate, we recommend three fundamental investment options for beginning and intermediate investors. Remember, we can assist you in determining which solutions are most suited to your financial objectives and budget.
If you own your home, you're already ahead of the curve. Tough times, such as what Canada is experiencing right now, can highlight the benefits of homeownership even more. As the cost of living rises, the value of your property is likely to increase as well.
If you don't own your home, saving and aiming to do so is a terrific goal to strive for.
Though budgeting for a deposit for a house may appear to be a challenging task, several options might help you become a homeowner. Call us if you're not sure where to start with the home-buying process. Our professionals can help you choose the right strategy and property for your goals and budget.
It's a terrific moment to start investing in real estate, whether you own your primary property or are still renting. Long-term rentals and short-term rentals are the two types of investment properties you'll buy as a single investor.
Traditional or Long-Term Rentals
A long-term or conventional rental is a home that has been rented for a long time. One example is a single-family home where a renter signs a one-year lease and brings all of their furniture.
Most tenants utilise the rental as their primary residence, making it an unavoidable cost. Long-term leases have a feature that can provide consistent returns in challenging times, especially when inflation is significant.
You'll need a budget for maintenance, renovations, real estate taxes, and insurance if you want to invest in a long-term rental and a strategy for managing the property. On the other hand, a well-chosen investment property should pay for itself in rental income, plus you'll benefit from appreciation as the property's value goes up.
We can assist you in finding a long-term rental property that fits your budget and financial goals. Please do not hesitate to contact us to explore your needs and the market possibilities in your area.
Vacation (Short-Term) Rentals
Short-term or vacation rentals are similar to hotels in that they provide temporary lodging. A short-term rental is a residential unit rented for fewer than 30 days. Websites like Airbnb and Vrbo now offer property owner provides the furniture and other facilities and many short-term rentals.
A short-term rental may provide a more significant profit than a long-term rental, but it comes at the ongoing costs and hands-on supervision. With a short-term rental, you're getting into the real estate industry and entering into the hospitality industry.
When done appropriately, short-term rentals can be both an inflation hedge and a rewarding source of income. You also have a low-cost vacation spot for yourself and your family when the house is not rented.
Please get in touch with us right away if you're interested in learning more about long-term or short-term rental options.
Because mortgage rates are likely to rise, you'll want to move swiftly to obtain the best value for the money.
You Are Our First Priority
In an economy like Canada, inflation is unavoidable. Fortunately, a well-managed financial portfolio that incorporates real estate can help you plan for inflation. In our current economic situation, owning a primary home or participating in a short-term or long-term rental will help you offset the effects of inflation and enhance your net worth, making it a strategic choice.
Vancouver house listings are hot right now, with an increasing demand for housing in the city. Many people are looking for a place to call home, and Vancouver has a lot of options for them.
Contact us today if you're ready to generate wealth and protect yourself from rising inflation by investing in real estate. Our real estate experts can assist you in finding the primary residence or an investment property that fits your budget.