Which Real Estate Investment Vehicles Can Provide A Potential Inflation Hedge?

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Edward Fernandez founded 1031 Crowdfunding in 2014 and has more than 20 years of experience in sales, real estate and investments.


As we encounter an inflationary environment unlike any in the last 40 years, investors are concerned about the possible ramifications. Inflation can have many causes, but I believe that supply chain issues and interest rates are the most important to focus on right now.

The reality is when supply chains are insufficient to meet demand, higher prices inevitably result. The current supply chain issues have been primarily influenced by the pandemic, with widespread shutdowns initially causing a massive suppression of demand for goods and services. As shutdowns eased over time and demand spiked, previously efficient supply chains have proven far too slow in ramping up to match it.

The interest-rate issue is just as pivotal, with the big question now being how high the Federal Reserve will raise rates to try to cool down inflation. If the Fed pushes too hard, we could go into recession, so there’s a fine balance to consider. The central bank has already initiated a series of hikes to the Federal Funds rate, including a rarely seen 75-basis-point increase in June. The ensuing report of eye-popping 9.1% inflation in June for that month prompted speculation the Fed might implement a historic 100-basis-point hike in July. Ultimately, the central bank decided on another 75-basis point increase. But it should still be noted that the measures taken in June and July represented the most significant increases since the early 1990s.

Personally, I don’t see interest rates really calming down for at least another year. Until then, we’ll likely continue to deal with high prices for gas, food, water and energy. But an interesting feature of the current economy is that people are also paying more for rent, which means real estate prices are still going up.

How is real estate continuing to increase in value, and how much higher can it go while rents and cash flow try to keep pace with inflation? I honestly don’t have an answer to that question. If I did, I’d probably own a 200-foot yacht and be planning to dock it in Monte Carlo for the next Monaco Grand Prix.

Identifying Opportunities

Amid this intriguing real estate market and rapidly rising inflation, are there investment vehicles that could provide a hedge, offering investors cash flow that helps offset rising prices elsewhere?

To answer this question, some investors are focusing on asset types that were heavily affected by Covid-19. These include student housing because many college kids weren’t going to school amid the shutdowns, along with senior housing, as many older Americans, unfortunately, passed away due to coronavirus exposure. The pandemic caused a flight from asset types like these, which have now become assets of opportunity that I’ve observed typically offer a better cap rate or cash flow than multifamily or self-storage types of investments.

Since we’re just emerging from the pandemic now, some people still perceive a strong risk of future shutdowns and are concerned about how student or senior housing might be impacted. I think the investors who can mentally detach themselves from those “what if” worries stand to benefit from the better opportunities and yields these asset types are currently providing.

What Investors Should Consider

While I believe senior housing and student housing are both generally appealing investment options right now, there are pros and cons to keep in mind.

Key benefits of investing in senior housing include that it is need-based, relatively recession-proof and has growth potential. There will always be people who need to live in senior housing, which should keep many facilities open under normal conditions. And even in a down market, investors can make money from the rental payments, whether private pay or government subsidized. Additionally, as the massive Baby Boomer generation ages and people live longer, there will be a greater need for new senior housing facilities to open. The possible risks of investing in senior housing, meanwhile, include high operating costs, location considerations, resident health and regulation changes.

In terms of student housing, key benefits include high demand, industry stability, diversified income, reliable payments, flexible rates and profitable returns. The near-certain demand for college education makes this investment a stable long-term choice. Additionally, because parents often serve as guarantors on a student’s lease, payments tend to be reliable. Students can also use financial aid to cover rent, while the steady flow of tenants cycling in and out means student housing properties can easily raise rates to fit market conditions. Meanwhile, possible risks of investing in student housing include high turnover, property maintenance, safety and liability issues and seasonal vacancies.

Cash-Flow Focus

The investing industry tends to be cash flow-driven right now. Additionally, older investors involved in real estate have typically built their wealth already and want to protect it.

Adding real estate to a portfolio can help to create a diversified portfolio with inflation-hedging assets. Investors often look to vehicles like Delaware Statutory Trusts (DSTs) and Real Estate Investment Trusts (REITs) to access these types of assets at a smaller scale to have a long-term non-market correlated investment as an opportunity to take advantage of the current environment. (Disclosure: My company works with DSTs and REITs.)

So the goals I suggest investors pursue are in the following order: 1) protect principal, 2) provide decent cash flow and 3) offer potential appreciation. Accordingly, investors seeking principal protection and access to solid cash-flow situations are looking closely at student housing or senior housing/behavioral health asset types. Appreciation is generally an afterthought, and it’s okay with them if that doesn’t happen because the other two considerations are paramount.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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