During economic crises, investors are encouraged to find an inflation hedge that will protect their investments. While most advisors still perceive value in stocks or bonds, the increase in U.S. prices and interest rates has created turbulence within the market, causing investors to consider alternative income sources. Lo and behold, one market that has remained consistently valuable in investment returns and growth is real estate—multifamily assets in particular. With new investment opportunities on the horizon, investors debate which resource will provide the best inflation hedge for 2023. Let’s find out:
Inflation Hedge Options for the New Year
Inflation and inflation hedges have become natural for the U.S. economy. Known as the increase of costs for goods and services, inflation occurs when consumer demand overpowers the inventory of goods. While inflation is not an unnatural occurrence, the degree and rates presented throughout 2022 are. This year alone millions have struggled to afford basic essentials like food or gas due to inflation rates. Most of the year inflation has been set around 8%, and only recently dropped to 7.11%. Considering the ideal rate is around 2%, investors are under pressure to preserve their investments with inflation hedges for next year. Here, we examine the top inflation hedge options:
Multifamily
Multifamily investments are one of the most stable inflation hedges available. Multifamily investments involve using management firms to invest in multifamily units like apartment complexes. Due to the high capacity of units within apartment buildings, multifamily investors find a large source of revenue from these properties due to the constant stream of housing demand from renters. This demand is one of the reasons why multifamily real estate is favored as inflation hedges as it generates consistently high income. During inflationary periods with low inventory, there will always be buyers looking to buy, rent, or move on the housing market. Thus, multifamily investing presents a financially wise and profitable inflation hedge to protect investor assets.
Vs. The Stock Market
Despite its notoriety, stock market investments tend to perform poorly during inflation. The stock market serves as a space for companies to buy, trade, and sell company shares to the public at a certain price. If companies perform well on the stock market, investors can expect significant returns on their investments and potentially cash in on those assets; if not, then investments drop, causing investors to lose funds with no guarantee of recovery.
Investors who invest their assets in the stock market place their investments at risk in shares at the cost of their own savings. Since stocks follow economic trends, stock investments tend to fail as an inflation hedge due to infrequency of demand. While certain stocks and stock market indices can actually track inflation rates, the quality pales in comparison to multifamily real estate investments. Considering the stock market volatility presented throughout 2022 to present day, using the stock market as a sole inflation hedge is not only unsustainable but nearly impossible to financially support.
Compared to multifamily investments, stocks fail as an inflation hedge due to their high risks with limited return potential.
Key Factors to Inflation Hedges
Investors typically use an inflation hedge to help their investments recover and rebuild losses. Despite the clear advantages of using multifamily investing as an inflation hedge, some investors hold onto stocks believing the assets will recover like the economy. While recovery is a key factor to investment strategies, consider these other factors prior to investment:
Stability
As the rate of inflation fluctuates throughout the year, stock market investments shift as well. For American investors trying to rebuild their savings and prevent further financial losses, this instability can derail their savings for retirement. Furthermore, stock investors must supply enough money to maintain their shareholdings, costing them more money that could be used for essential items.
Multifamily investors have no such concerns with their investments; since housing demand is relatively consistent throughout the year, investments continue to build over time and are not affected by inflation rates. There is low risk involved with investing in multifamily assets, thus allowing investors to relax and reap the rewards of their returns without depleting their personal income.
Taxation
The multifamily investment market is a highly tax-advantaged industry. By law, the IRS allow real estate investors to take tax deductions on expenses incurred to manage a multifamily property from your total income.
Stock investments don’t offer such benefits; once a share is bought or sold, it’s taxed as income. Capital gain stocks held for at least one year are taxed up to 15 – 20%, while those held under a year range anywhere between 10% – 37%. As a result, stock investors can lose a significant portion of their inflation hedge and investment returns through taxes alone.
Value
Stock investments drop in value more often during inflation than any other period. Due to the rapid changes and instability of the stock market, investor assets can rise in value within a week and hit rock bottom in a second. On Wednesday Dec. 14th, reports stated that the Dow Jones Average fell 239 points—while earlier that same day it was set at 287 points. These shifts make it difficult for investors to build sufficient income, thereby delaying their long-term financial goals.
Surprisingly, multifamily investments are inflation resistant and perform better during inflationary periods. As the cost of living rises, rents increase while the debt on the property stays the same, widening the profit margin. The increased demand for housing can raise the appreciation value of multifamily properties, which over time can create large dividend payments that typically twice exceed stock market values.
Entrust Apta Properties with Your Multifamily Investments
At a time when investors must carefully save for the future, multifamily investments serve as the best inflation hedge and resource to protect your finances from loss. This protection is particularly beneficial to stock investors, who may rely on real estate to support and diversify their portfolio assets. To ensure the best quality of returns and benefits without managing assets, investors can rely on Apta Properties’ passive investing methods to generate high returns for years to come. Interested in starting your multifamily investment strategy? Visit Apta Properties today to learn more.
