One thing that all investors worry about is that their investments won’t appreciate nearly as quickly as they’d like or need them to in order to effectively hedge against inflation. Most investors are in agreement that savings are the first thing to be swallowed up by inflation, more specifically bank deposits and savings bonds. So what’s the best way to effectively hedge against inflation using a financial plan?
Over time there is really only one type of investment that has been proven to be favorable in the face of inflation. That is residential real estate. The following is a brief look into residential real estate investment and how, when used as a financial plan, it is usually successful in hedging against inflation.
When you invest in residential real estate you effectively remove the need not only to pay rent on a piece of real estate you have no vested interest in, but you also free yourself from the captivity of a landlord and their ability to raise your rent consecutively year after year. Having a mortgage with a fixed rate even further sweetens the pot. How?
A fixed rate allows you to completely beat the inflation bug so that you will continue to pay the same amount of money to live in your home in spite of inflation’s hold on other things in the economy. This can have a huge impact on your budget when you consider that a mortgage is usually one of the biggest expenses in any home owner’s budget. It’s the long term investment that makes the most sense, however.
If you hold onto your real estate for the next 30 years (the most common length of all real estate investment terms) and you don’t refinance, you will pay the same amount for your investment over the life of the term with no increase, despite increases in inflation. And, when the 30 years is up not only will the note be paid, your personal inflation rate will have actually dropped. Why? That’s because, you’ll be living rent-free in your home. You also can reap any number of tax benefits that come with owning real estate.
It’s for these reasons that residential real estate investment is one of the best and most effective financial plans for hedging against inflation. Some will argue that your investment won’t hold its own when the price of your property falls. This isn’t true, however.
Even if the value of your residential real estate should fall, or even plummet, as inflation rises around you, your mortgage payment will not, and someday, that payment will become nonexistent. So even if you couldn’t resell and make more than your initial investment, what you save in rent-free living, and tax deductions, will more than make up for it. No matter how you look at it…residential real estate is a great financial plan to hedge against inflation.