Here's How to Hedge Inflation With Your Real Estate Portfolio

Persistent Inflation - Let's Get Hedged

Diagnose Your Properties

This is a good time to take a full diagnostic look at the health of your properties.  One of the ways to know the condition inside and out is to conduct an inspection.  Making note of the current age of more expensive ticket items like HVAC systems, windows, water heaters, etc. Maybe your property(s) are due for some updates and remodeling.

Are any of the mechanicals close to life in the next year or three? If so, it’s very likely, by jumping ahead and replacing them now rather than waiting for them to break will not only allow you to buy them at a discount today, but could enhance the marketability of your property as more efficient. Efficiency will become increasingly important as utility cost and rents continue to rise with inflation. Tenants will increasingly seek properties that are more efficient in the coming years as a result. Maybe you have a cracked or fogged up gross window in a property. New windows are not only more efficient, but also make a home feel cleaner, newer, and nicer. As time goes on, properties can become either worn or outdated. Updating flooring, paint, or new fixtures can make a tremendous improvement to your numbers. Other times, some properties might benefit from going farther, maybe it still has cracked laminate butcher block countertops, yellowed tile, and red wallpaper! It’s a good time to upgrade; it’s only going to cost more in the future!

When Will the Price Increases Stop!

Price increases have been consistently coming down the line on all these categories, and we haven’t seen any signs of them letting up yet. Although the Fed has agreed to taper back its purchasing programs, it will still take time to realize the full (inflation) cost to come through the pipeline. Additionally, we have yet to experience the full effect of the money coming to market from the infrastructure bill that congress recently passed. Once the full impact of that new money comes into play, it will also be competing with our money after the same or similar goods and labor in the construction industry.

Properties that are kept up to speed, rent quicker, bring higher rents, are generally cared for better, and tenants stay longer when they are comfortable. All these things combined improve the bottom line. In high inflation periods, you can increase the value of your assets at a discount.



Size Up Your Portfolio

Since we know historically Real Assets like Real Estate maintain and more commonly gain value during higher inflationary periods, it’s a good time to take stock on your existing investments to make sure they are well diversified and inflation protected. With the Fed already on its way to tapering its purchasing program, we are seeing the effects with rates beginning to tweak up a bit, and expect this pattern to continue as they exit purchasing. Rates are still good but pushing upward. Locking in a lower fixed rate at today’s prices is another way to hedge against inflationary pressures and grow wealth with a Real Estate Portfolio. As rents rise with inflation, you benefit on the spread from purchasing at both the discounted fixed rate of today and the future value of equity of the asset in the future after the inflation wave passes.

Action Items

• Take inventory of where your properties are at in their mechanical and cosmetic cycles.
• Get Estimates for Replacements and Improvements
• Work with your PM to Prioritize Improvements that will offer you the best return on dollars spent.
• Implement an aggressive plan to capitalize on the value of today’s dollar that works within your budget.
• Evaluate investments for inflationary stresses, Reallocate funds into Real Assets Where it Makes Sense
• Consider Adding Properties to Your REI Portfolio

Expected Benefits

• Improved Rents
• Longer Tenant Retention
• Lower Turnover Cost
• Less Maintenance Calls
• Lower Vacancy Rates
• Increased Equity at a Discount
• Additional Properties / Multiplied Inflationary Benefits

I'd love to hear from you and your thoughts on this article. If you have questions about tenant landlord relationships or have an issue with a tenant relationship in Lee's Summit, Blue Springs, Raymore, Lone Jack, Pleasant Hill, Grain Valley, Independence, Overland Park, KS or surrounding areas. Click below to give us a call or send us a message by text in lower right!