In commercial multifamily real estate, there’s a language that is spoken when you are connecting with brokers, property managers and other investors in the profession. To avoid sounding like a novice, an investor must be fluent with the real estate terminology to be taken seriously. Let’s take a minute to breakdown one of those terms.
In order to dive into the benefits of real estate investing in multifamily we need to understand the inflation rate. The inflation rate is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time. Take something that costs 50 cents. At an annual inflation rate of 15%, one dollar will only be worth 50 cents over 5 years. That indicates a decrease in the purchasing power of a nation’s currency. The stock market inflation rate has been 1.6% over the last 10 years. The Federal Reserve targets 2% annually, they even list that on their website.
What that means?
- Target 2% aims to devalue your savings and reduce your purchasing power by 2% every year.
- If you invest in the stock market and make an average of 8% a year that really means you’re really getting 6%.
How does that tie into Apartment investing?
- We buy for cash flow and not appreciation. There are other reasons such as long-term debt with adequate cash reserves but let’s focus on cash flow. When inflation goes up the cost of housing (rents) goes up.
- As an apartment investor that is a good thing because the revenue stream is increasing. If you’re getting long term fixed rate debt on it, your biggest expense is held in check.
- Inflation allows us to increase rent while our debt decreases in value.
In summary, inflation devalues the value of stock returns while real estate multifamily investing is a great hedge against inflation. The driving force behind that is as revenue increases when inflation increases.
By learning these concepts and terms, you’re separating yourself from the novice investor looking to be more active than passive. Here’s where you can learn more multifamily investing terms.
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