Inflation is here and shows no signs of stopping. The consumer price index reached 283.716 points in February 2022, almost 8% higher than in February 2021 – the largest year-on-year increase in 40 years. Investors are increasingly relying on bromide as real estate can be a good hedge against inflation. But some types can be better coverage than others, says Gary Beasley, CEO and co-founder of Roofstock. And residential real estate, especially single family rentals (SFR), should be on an investor’s radar.
“In an inflationary environment, residential real estate may offer a more balanced and reliable option compared to commercial properties or any other type of real estate investment,” says Beasley. “Investors benefit from models like SFRs and multi-family rentals because annual leases allow them to reflect rental price inflation to offset rising prices.”
The housing market has taken off in the current era of inflation, with values and rental prices skyrocketing over the past two years. According to Yardi Matrix, SFRs have done particularly well, keeping pace with the exceptional growth in multi-family rents while recording a sale price increase of almost 19% last year. Meanwhile, Green Street expects the SFR market to remain healthy in the near term and provide better revenue growth than most commercial real estate sectors over the long term.
Beasley notes that because rent increases reflect other inflationary factors, LICOs can be a particularly effective hedge against inflation. And since annual leases are the norm in residential real estate, investors can better align rental prices with rising spending year over year.
“While real estate is a market that is impacted by inflation, the ability to adjust rental prices acts as a buffer against other investments, such as bonds,” says Beasley. “Other [factors] investors should consider including the rising price of building materials and labor for upgrades and repairs, tenant migration patterns as a result of remote working and l jobs, as many companies are pushing for a return to the office.
Beasley thinks the current inflationary cycle will boost real estate over the long term, even with aggressive action from the Federal Reserve.
“A modest and predictable rate increase should actually benefit long-term investors as it should temper appreciation rates, rather than allowing prices to rise to a level where absolute declines could be triggered,” he said. Beasley said. “As rates go up, we shouldn’t see asset prices go down; more likely we will see the rate of appreciation slow down [to]say, a high single-digit rate of appreciation this year and should move closer to the long-term average of around 4% over time.
So, are SFRs the ideal inflation hedge for 2022? “I think investors need to understand that inflation is almost certainly here to stay, at least for this year, and recognize that your money has to be somewhere,” Beasley says.