The Best Real Estate Strategy for Periods of High Inflation

March 15th, 2022
Real Estate Hedges against inflation

Inflation is at the tip of everyone’s tongue — from financial professionals to ordinary Americans feeling pain at the pump and the grocery store. 

The US Bureau of Labor Statistics reported a 7.5% rise in the Consumer Price Index (CPI) in January, the highest in 50 years. Compare that to 1.53% inflation in 2020 all year. Nothing makes it real like $5 gas. 

Real estate is famously a hedge against inflation … but will any investment do? Behind the scenes, hyper-inflation is rewriting the rules of real estate investment. Investors who “stick to what they know” may find themselves in trouble. 

Let’s look at three core strategies of real estate investing and pick the best one for this period of unprecedented inflation … 

Fix-And-Flip

Even if you’re new to real estate, you have probably heard of “house flippers” — maybe even watched a few on TV. The premise is simple — buy a fixer-upper at a low cost, renovate the property, and sell it for market value. This can be done with single-family homes or commercial properties. 

In periods of inflation, the price of real estate tends to go up quickly, along with the price of everything else. That’s a major reason why real estate is such a good hedge against inflation. This would seem to bode well for the fix-and-flippers, who can be pretty confident of a good price when it comes time to sell.

Unfortunately, another thing that goes up is the cost of supplies and labor for the renovation. Flippers are currently seeing their construction projects go way over budget. 

Additionally, as property owners scramble to have work done before prices go up even more, renovation contractors become harder and harder to find. Even with our relationships in the industry, Martel Turnkey is having trouble getting on our preferred contractors’ schedules. If you have to wait, that’s more time with your property vacant.

To make matters worse, one of the ways the Fed could try to control inflation is by raising interest rates. There’s rumbling that that could happen as soon as April. If that happens, the demand for real estate could cool, and flippers will be stuck unable to get the high sale price they thought they could a few short months ago. 

 

Verdict: AVOID

Fix-and-flip is a bad bet in times of inflation. The risk of going over budget on the rehab and failing to hit the resale strike price is just too high. 

BRRRR

“Buy, rehab, rent, refinance, repeat.” It’s a popular way to scale fixer-uppers into a portfolio of rental properties. If you’re unfamiliar with the strategy, check out our popular blog on the subject here

Except … one of the “R’s” is “rehab.” The same problems as apply to “fix-and-flip” rehabs apply to BRRRR rehabs — long waits, spiraling costs of materials and labor. A protracted rehab period is a great way to start your investment already in the hole.

To make matters worse, if the Fed increases interest rates, another “R” becomes a problem — refinance. Your refi may become more expensive, hampering your ability to create cash flow and/or afford the last and most important “R” — repeat.

 

Verdict: AVOID

It’s just not a good time for BRRRR, with the high costs of labor and the uncertain future of the refinance market. 

 

NOTE: passive investors in multifamily syndications are often banking on a similar version of this strategy. Syndication sponsors typically look for “value-added” property with the option to refi in a few years.

Turnkey Rental

With turnkey rental, there’s no need for rehab. The property is already in great condition, and in some cases the tenant and/or management is already in place. 

Investors in REITs, which buy up “Class A” property in good neighborhoods that have already been leased up (aka “core” assets”), are often exposed to this strategy as well.

Of course, no rehab means no risk of cost overruns or delays on that rehab. Turnkey rentals tend to sell at a higher price and therefore produce lower yield, but with leverage and tax benefits, even turnkey assets can easily beat the stock market.

Plus, in times of inflation, both property value and rents tend to go up … but your mortgage stays the same. This is good for cash flow and appreciation. 

 

Verdict: BUY

In an inflationary environment, turnkey rentals provide above-average yield with minimal risk — the perfect hedge against inflation. 

 

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It can be tough to let go of a strategy that has been working for you … but when inflation hits, turnkey rentals are the way to go. If you pick the right market, you won’t even miss your flips and BRRRRs. 

Ready to at least consider it? Reach out to Martel Turnkey today! We always have a robust selection of properties available for turnkey investment in some of the country’s fastest-appreciating rental markets. 

 

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