All the Rules are Changing & You Need to be Ready

By Strategic Passive Investments

When someone mentions the word “inflation” to real estate investors, it is hard not to look smug. After all, we hold in our portfolios the world’s best hedge against that nasty thief of value and savings.

However, in the 2022 post-pandemic world, we probably should not be looking quite so smug. In fact, real estate investors everywhere need to take a few minutes to evaluate just how post-pandemic inflation really is affecting the traditional long-term real estate investment portfolio. The effects are avoidable, but not unless you stay ahead of the game and fully informed.

How Inflation Traditionally Affects Real Estate

Traditionally, inflation has affected real estate investors who hold long-term real estate investments by creating an enviable scenario in which their payments on that real estate stay the same while the rents brought in by that real estate rise, sometimes astronomically, compared to the monthly mortgage.

That is still the case. However, post-pandemic inflation is white-hot. It rises quickly and has combined with massive double-digit appreciation over the past few years to create a boiling morass that can sink your portfolio if you are not aware of the potential pitfalls.

Sure, real estate will always have intrinsic value (you may have heard this shouted across a room as “Real estate is never worth zero!”) and, if you own some, you can probably charge more than you paid for it for someone else to live in it, but there is a little more to the equation than there used to be.

4 Things to Know About Post-Pandemic Inflation

Because of the combination of inflation and appreciation, the real estate investing world looks different than it ever has before. Here are four things to know:

1. Inflation may have put your home insurance policy out of whack.

Thanks to skyrocketing home values, skyrocketing inflation, and skyrocketing supply-chain difficulties, it is not only necessary to review how your policy values your home; it is necessary to review how much it would cost you to replace your home and the items inside it. This includes your rental properties! Furthermore, if you or your tenants are working from home and hosting a variety of expensive equipment for that purpose, it is possible that neither the renters’ insurance nor your home insurance policy covers that equipment. You both need to find out who is responsible and if said person is prepared.

2. Rents may not rise along with inflation.

Traditionally, it was reasonable to expect rents to rise along with inflation. Today, this is certainly not the case in all markets because some market participants simply cannot afford to take the cost-of-living any higher. People are leaving rather than pay the higher rents. This is a particular threat to multifamily developments, which tend to be more sensitive to rising costs of necessities like food, transportation, and a living wage. Single-family residential (SFR) investors will likely have a longer lag time before they are affected, but the trend could reach this sector as well.

3. Private equity has its eyes on the prize.

Although retail homebuyers are finding it increasingly difficult to acquire a single home, private-equity firms are diving into the real estate market with even more fervor than they did after the 2008 crash. Because most investors automatically consider real estate a hedge against inflation and because these firms are playing on a completely different level than individual investors or would-be retail buyers, private equity funds are snapping up huge chunks of real estate across residential and commercial sectors in hopes that the cost of building new facilities will be prohibitive in the future and force tenants back into properties currently posting weaker returns. In Q1 2022, Blackstone reported its “opportunistic real estate portfolio” grew more than 10 percent and the company has committed $115 billion to real estate investments in the last decade.

4. Buyers are pulling back to wait for ‘the crash.’

Millennials and Gen Z (Zoomer) buyers are about to hit the housing market in full force, and while most of these younger buyers remember the housing crash of the mid-2000s, they do not really remember what caused it. After all, they were still living at home or had boomeranged back due to the Great Recession. They did not really experience the causes of the housing crash, like absurd mortgages and awful lending practices. As a result, many now report they are going to “wait for the housing crash” in 2023 or 2024 rather than buying now, while interest rates on many mortgage products are still incredibly low compared to historic high rates.

Today, 30-year fixed-rate mortgages are posting around 6 percent interest rates (or a little lower), which is about where things were hovering before the housing crash in 2007. By comparison, in 2000, interest rates were higher than 8 percent, and in the 1990s, interest rates started out in the double digits. This lack of perspective is likely to create a generation of renters who inadvertently miss the boat and, as a result, are seeking either long-term creative financing or stable, long-term single-family residences for their families.

This is a huge opportunity for real estate investors because the combination of rising interest rates and inflation means that there is only a little time before these folks can afford barely any home at all unless they rent.

Borrowers and Renters are Likely to be More Reliable, Not Less as the Year Progresses

A lot of investors and would-be homebuyers say they expect to be able to snap up lots and lots of inventory when the foreclosure wave finally hits the housing market, but that wave is likely not coming.

Thanks to rising prices, homeowners are likely to sacrifice quite a bit to stay current on their current monthly payments while renters realize that there are many others out there waving larger monthly rent checks temptingly in landlords’ faces. As a result, it is quite probable borrowers and renters will become more diligent in making payments on time and keeping their books in good order – at least as far as housing is concerned.

It will be up to real estate investors to identify opportunities when they are presented rather than waiting for a housing crash to fall in their laps.