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The goal for any investment is to have it return a greater amount than what you put into it in terms of both time and money. However, in this elevated inflationary environment, your investments need to be working harder than ever for you just to keep from going backward.
With the headline inflation number over 8 percent — and some saying it is actually higher than that as not all essential living expenses are factored into that number — it is essential your investment choices perform better than ever.
What are the investment alternatives?
Suppose we accept that our goal for any investment is to perform well and better than inflation. In that case, we must consider all available options to maximize our investment returns.
1. Wage growth in 2022: If we look at our time as an investment, then we must include wage growth in the analysis of alternative investments to real estate. According to the U.S. Bureau of Labor Statistics from Sept. 13, 2022, real average hourly earnings have decreased 2.8 percent seasonally adjusted, from August 2021 to August 2022. Did you get a 9 percent pay increase this year? If so, good for you.
2. Stock market performance in 2022: Year-to-date total return for the S&P Index is down 17.12 percent according to MarketWatch. Add in the loss of purchasing power with inflation, and you are walking backward 30 percent in 2022. You can pick your favorite measure of market performance. They are all down similarly.
3. Bitcoin performance in 2022: According to MarketWatch, Bitcoin is down 57.76 percent year-to-date. Clearly not a safe haven investment yet.
4. Gold performance in 2022: Even our old trusted friend Gold is down 6.82 percent year-to-date according to MarketWatch.
5. Small business performance in 2022: According to an article entitled 41 Small Business Statistics: Everyone Should Know from April 2022 only 40 percent of small businesses are profitable. Not great odds.
Why real estate is positioned to perform well in 2022
If our goal in investing is to make money and to make more than the inflation rate, how does real estate compare to the alternative investments?
- Appreciation in 2022: According to the National Association of Realtors (NAR), median single-family appreciation is up 15.7 percent from a year ago in 2022. Multifamily and industrial real estate markets saw price appreciation up 10 percent in 2022 according to NAR.
- Rent in 2022: According to Redfin as of June 2022, median increases in rent were up 14 percent year-over-year.
- Mortgage interest rates: While interest rates are as high as 7 percent for investment properties, it is still lower than the headline inflation numbers and mortgage rates historically.
- Housing inventory: Inventory has been down and Freddie Mac states there is a 3.8 million shortage of housing units to meet available demand that would need to be built in the coming years in the U.S.
Basically, as long as interest rates are below inflation and the cash flow received is greater than expenses it is a good time to invest in real estate. There is also greater demand than the supply of housing units making it a favorable time to invest. Appreciation is an added benefit to investing in real estate as well as the favorable tax benefits at the end of the year.
What are the opportunity costs for waiting to invest in real estate?
There are always opportunity costs for not making a decision or forgoing one decision over another.
- Housing prices may very well continue to increase
- Interest rates may very well continue to increase
- The money you have to invest will continue to lose purchasing power with inflation
The real question to ask yourself is where can you put your money right now besides real estate which will give you so many benefits and favorable returns with minimal downside risk.
Why wait to buy real estate?
In order to keep from going backward, we must invest our resources in things that go up in value and ideally greater than inflation. Unfortunately, just about everything is not even keeping up with the pace of inflation — including wages.
Most investments in 2022 are not only not keeping up with inflation but in many cases are losing value. In order to survive and thrive, we cannot allow this to happen to ourselves and the people we care about.
This is why investment real estate is the best option to protect and grow your wealth and why you should not wait to buy as a new investor.
Jeff Roth is the founder of Arbor Advising. You can connect with him on Linkedin and Twitter.
