How Inflation and Rising Interest Rates
Affect Multi-Family Investments
For the longest time, the Federal Reserve has maintained the inflation rate at nearly zero until April of 2020 when the global economy was affected by the impact of the Covid-19 pandemic. By December 2021, inflation rose to a record high of 7%. In 2022, we have continued to witness labor and supply shortages and this has been the main driving factor for inflation. So, how does this affect multi-family investments in 2022 ?
The demand for rental properties will increase
Just like any investment, operating in an environment with high-interest rates and rising inflation rates requires a deeper risk assessment. The good news is that as inflation rises, so does the demand for rental properties. Since rising interest rates are a sign of positive economic growth, real estate investors in rental properties benefit from increasing demand.
Multi-family properties are known to perform well when there is high inflation. Low inventory and high demand drive the prices of multi-family homes up. The rise of inflation means prices for new homes will continue increasing and this will push many potential home buyers to consider renting multi-family properties as their purchasing power reduces.
It provides a hedge against inflation
Home affordability is also affected as the demand for rentals increases. As a result, real estate investors in multi-family properties will have a unique opportunity to raise rental rates which helps offset the increasing cost of construction, property taxes, insurance, and labor costs. Investing in multi-family properties provides a great hedge against high inflation rates.
Most multi-family properties have active mortgage loans with fixed-interest rates. As rental prices increase due to inflation rise, real estate investors are able to maintain debt service payments as a result of an increase in demand for rental multi-family properties. The inflation hedge factor is likely to drive more investments in multi-family properties in 2022. This will help stabilize mortgage interest rates as many lenders would consider offering affordable mortgage loans to investors in multi-family properties as the demand for a low cost of capital increases.
Looking into the future, the demand for multi-family properties will continue increasing as the housing market continues to struggle with an unprecedented shortage of home supply. Rental income from multi-family properties will continue to increase in the second quarter of 2022 and beyond until the market stabilizes. Inflation brings disruptions in the economy but for real estate investors in multi-family properties, these challenging times provide a unique opportunity for growth as great deals can be executed when there is high demand for rentals and low inventory.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, please consult with your own CPA, legal, and financial advisor before investing.