With global upheaval and the remnants of the pandemic, 2022 predicts a volatile year for many economies. Among other effects, this volatility pushesinflation higher than expected, which can have major repercussions in the real estate market. In order to survive and thrive like skilled real estate investors such as Simion Kronenfeld, you need to understand the short- and long-term implications of this rise in inflation.
Increasing Construction Costs
Inflation means that prices increase across the board on most products, which in turn affects the amount builders pay for materials. With construction costs, gas, and other resources skyrocketing, it becomes less and less profitable to build houses and other structures. This slows the creation of new properties, which limits potential real estate investments. Veterans of the real estate industry, such Simon Kronenfeld, know not to invest too heavily in new construction when inflation is rapidly rising, as doing so increases the risk of a cost overrun and a lost investment. Instead, shifting toward more reliable, low-cost construction is a safer bet.
Decrease in Historical Debt
It’s worth remembering that while inflation drives current prices up, it doesn’t change the amount of existing debt you possess. A debt of $100,000 remains at $100,000 (minus your repayments), even if the relative value of that sum changes according to market forces. This means that inflation can be beneficial to homeowners and certain investors who take an initial loss but then recoup it through an increase in returns. Do note, however, that this should not be seen as an open invitation to invest heavily and take on debts just before you suspect inflation to kick in. Governments work very hard to limit inflation to acceptable levels, and you shouldn’t take such risks unless you are well-informed.
The Residential Rise
From an investment point of view, residential properties become a safer bet in times of high inflation. Home purchases often come with a fixed interest rate on the mortgage, which means that the buyer pays the same amount of interest even when real estate rates rise. On the other hand, when rates get cut, a homeowner can refinance to take advantage of the decrease. The result of this is that those who can purchase in the residential sector often invest there, as inflation begins to rise. However, the window doesn’t stay open for long—the higher interest rates get, the less worthwhile a residential purchase becomes.
The Rental Dilemma
While buying a home at a fixed rate is a good option just before interest rates begin to rise, those caught amid inflation or who simply don’t have the funds available to buy property find themselves struggling. Rental rates rise with the level of inflation, meaning that there is little respite from those who are going month to month on a lease. This can be both a problem and a boom for those who purchase a rental property. On one hand, those who have other options may avoid renting because of inflation. On the other hand, the rise in rent makes building materials for upgrades and new construction more affordable. Real estate investors like Simion Kronenfeld know to balance these factors in order to pursue success.
Inflation is bound to happen in 2022; the only question is how quickly prices will rise. With that in mind, follow the advice of Simion Kronenfeld and other real estate experts, who know how to remain flexible even as the market undergoes change.