Updated: Dec 24, 2022
As inflation is getting out of control, so are the worries for the rental real estate market. Homeowners all over the U.S. are feeling the pressure of inflation that has everyone scared about their costs of living. From gas to electricity and food, everything seems to be getting out of the ordinary person’s reach.
Not only does it make it hard to build a house as construction materials get more expensive or to buy one as interest rates are getting higher, but it also makes rents skyrocket. If you want to find out how inflation is currently affecting the rental real estate market, keep reading.
What is inflation?
Inflation is a general increase in the prices of goods and services in an economy. It can be caused by many different factors, including increases in wages, commodity prices, or interest rates. When inflation goes too high, it becomes difficult for people to afford basic necessities such as food and shelter. In severe cases, it can lead to a decrease in the value of money and an increase in inflation-related unemployment.
The Federal Reserve Board has a responsibility to maintain low levels of inflation so that American consumers have enough purchasing power to purchase items necessary for everyday life. While there are many different types of inflation across the world, generally speaking, it's bad news for creditors and good news for borrowers.
How inflation affects landlords
While many still discuss whether or not inflation is good for landlords, there are definitely certain pros and cons. Many economists say that inflation might be any real estate investor's friend if they know how to take advantage of it. These are the people that become property owners with the goal of investing long-term.
As everything else rises in price, so is the increase in real estate value. In fact, real estate surpasses other types of investments and will provide more stability against economic fluctuations, given that it doesn't fluctuate with stock markets or commodities. According to these Honolulu property managers inflation raises the prices for properties, allowing investors to sell at a higher price than they’ve bought it for, giving them a good ROI (return on investment).
Another benefit for landlords is the increasing rents, the cash flow that makes the rental market a great investment. History has shown us that inflation leads to higher rent, which we can see in many U.S. states at this point, with rent rising at different rates everywhere. The cost of rent may exceed the rise of other necessities, which means a higher income stream for the investor.
With construction prices going up and banks more unwilling to lend money, the purchase of real estate becomes more difficult, therefore leading to more people delaying buying a home and opting for renting instead. This means the demand for landlords will increase.
Last but not least, inflation leads to debt depreciation, meaning that real estate investors will have cheaper debt.
Even though some good things come during inflation for investors, there’s also the darker, worse side. Not only there’s an increase in the costs of goods,, but also in the costs of services. Maintenance and reparations will be more expensive for landlords during this period. Most likely, vendors will demand more for the same services as they also make an effort to keep up with their expenses.
Another interesting thing to look at is a study in which landlords from 10 different states with the highest inflation rate were interviewed, and the majority of them said that unpaid rent is the main reason for eviction notices. Many landlords risk having a vacant property if the rent price gets out of hand.
How inflation affects tenants
If a rent increase is a good news for landlords, it’s a terrible one for the majority of tenants. With the rent getting higher, it’s becoming more and more challenging for people to keep up with it. More often than not, people sacrifice in other areas of their lives in order to afford their shelter. As we discussed above, the rise in rent cost also has led to more evictions. Tenants who are receiving government assistance may experience a loss of purchasing power as the value of their income decreases over time.
So is inflation good or bad for the rental market? Well, it depends on which side of the deal you’re on and what’s the long-term strategy. Depending on what the future goals are, real estate investors might consider delaying plans for investments, or, they can take advantage of the unique market opportunities.
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