Effects of Inflation: Strategies for Wealth Preservation

While inflation has generally become a regular occurrence in the context of economic growth, elevated or unexpected inflation can present obstacles for prudent wealth preservation and economic stability. To safeguard and augment wealth over time, it is essential to understand the causes and ramifications of inflation. By proactively implementing effective strategies, investors can mitigate the impact of inflation and secure their financial well-being. Through a combination of foresight and ongoing vigilance, individuals can take control of their financial future—protecting their investments from the eroding effects of inflation and ensuring long-term prosperity. 

 

Causes of Inflation 

Various factors, such as imbalances in supply and demand, supply shocks, and expectations of future price increases, can drive inflation. 

Imbalance in Supply and Demand 

When demand for goods and services outpaces available supplies, inflation occurs. In such cases, producers and businesses may raise prices in response to the heightened demand, which can lead to inflationary pressures. On the other side of this equation, when the overall money supply increases and productivity remains generally equal, inflation tends to follow as well. In recent years, we’ve seen money supply increase exponentially, leading to very substantial inflation. 

Supply Shocks 

Disruptions in supplies can also trigger inflation. For example, a sudden decrease in global energy supplies due to geopolitical tensions or natural disasters can lead to a spike in energy prices. This increase in production costs can ripple through the economy, contributing to inflation. 

Following Russia's invasion of Ukraine, international sanctions restricted countries in the "collective West" from purchasing energy supplies directly from Russia. While Russia still sells energy to some countries, the restriction on their exports impacted global energy markets and led to increased prices. This tightening of the market contributed to inflation. 

Expectations of Inflation 

Expectations of future price increases can also influence inflation. When people anticipate prices will rise in the future, they may demand higher wages to protect their purchasing power. In turn, businesses and producers may respond by raising prices to cover the increased labor costs. This dynamic of wage-price spirals can contribute to inflationary pressure. 

 

Inflation erodes money's value, diminishing purchasing power and challenging the maintenance of a consistent standard of living.

 

The Effects of Inflation on Wealth Preservation  

Reduced Purchasing Power 

Inflation decreases the value of money over time, leading to a reduction in purchasing power. This erosion of purchasing power can gradually diminish the value of your wealth. As a result, it becomes more challenging to maintain the same standard of living because the same amount of money will buy fewer goods and services. 

Erosion of Investment Returns 

Inflation can erode the real returns on your investments. When the inflation rate exceeds the returns on your investments, it diminishes the purchasing power of your investment gains. For example, let's say you earn a 5% return on your investments, but inflation is at 3%. In this case, your real return is only 2%. This example illustrates that even when inflation is at a lower rate than your return, it still reduces the purchasing power of your investment gains. 

Negative Impact on Fixed Income Investments 

Fixed-income investments such as bonds and fixed-interest securities have a predetermined interest rate. In an inflationary environment, the purchasing power of the fixed income generated by fixed-income investments such as bonds and fixed-interest securities decreases—meaning the buying power of the interest income may not keep pace with the rising cost of goods and services. As a result, the real return on fixed-income investments may be lower, impacting your overall strategy for preserving wealth. 

Real Estate Value Fluctuations 

Inflation can have a dual impact on real estate. On one hand, property prices may increase in an inflationary environment, leading to appreciation in the value of your real estate holdings. On the other hand, the real value of the asset may decrease if the rate of inflation outpaces the growth in property prices. This can make it challenging to preserve and grow wealth through real estate investments. Inflation can also impact income and expenses that real estate properties generate, elevating both sides of the income statement. 

Increased Cost of Living 

Inflation leads to an increase in the cost of goods and services, which affects your cost of living. When prices rise, your day-to-day expenses will increase, impacting your ability to preserve wealth. The higher cost of housing, food, healthcare, and other necessities can eat into your savings and limit your wealth accumulation. 

 

Investing in multifamily real estate serves as an effective inflation hedge, leveraging historical property value appreciation

 

Mitigating the Effects of Inflation 

To mitigate the impact of inflation on wealth preservation, it is crucial to adopt various strategies, such as: 

Diversification 

Diversify your investment portfolio across different asset classes, such as equities, real estate, commodities, and fixed income. A diversified portfolio can help you spread risk and mitigate the potential negative impact of inflation on your overall wealth. 

Inflation-Protected Securities 

Consider investments in inflation-protected securities or bonds. These securities are designed to provide returns that keep pace with inflation, ensuring your purchasing power is preserved in an inflationary environment. 

Real Estate Investments 

Investing in real estate, specifically multifamily, can be an effective hedge against inflation. Historically, property values tend to rise with inflation. Furthermore, rents are marked to market on an every 12 month basis, taking inflationary effects into account on the income side of these investments for owners. By investing in this type of real estate, you can benefit from the appreciation of property values and protect your wealth from inflation. 

Investing in multifamily real estate is beneficial for several reasons: stable cash flow from multiple rental units, economies of scale for cost-efficiency, diversification to spread risk, accessible financing opportunities, and the potential for property value appreciation over time. 

Equity Investments 

Equities have the potential to outpace inflation over the long term. Companies can raise prices for their products and services, generating higher revenues and deliver real returns which outpace inflation. However, it is essential to assess the risk profile of equity investments before making any decisions. 

Regular Review and Adjustment 

Review your investment strategy and make adjustments as needed to adapt to changing market conditions and inflationary pressures. Staying proactive and informed is crucial in preserving your wealth and ensuring its growth over time. 

 

CF Captial Leveraging Real Estate as a Hedge Against Inflation 

Inflation can have a significant impact on wealth preservation and growth. However, by implementing these strategies, you can navigate the challenges of inflation and ensure the preservation and growth of your wealth over time. At CF Capital, we focus on acquiring and operating multifamily assets that provide stable cash flow, capital appreciation, and a margin of safety. With our expertise in acquisitions and management, we prioritize capital preservation while delivering superior risk-adjusted returns. When you invest with CF Capital, you can navigate the complexities of inflation with confidence, knowing you have a trusted partner dedicated to optimizing your wealth preservation and growth strategies. 

 

Elevate your investment portfolio with this infographic outlining 9 key benefits of investing in multifamily real estate. Download Here

 

From the Desk of CF Capital: December Investor Report

Hello Friends and Investors, 

The holiday season is officially upon us, and the federal reserve continues their march forward on their fight against inflation. Our team at CF Capital has been in the spirit of giving by committing time to serve in our community and we've been hyper-focused on up-leveling our asset & property management teams in an effort to optimize the fundamentals of our investments as we navigate this market cycle.  

Ahead of the December FOMC meeting next week, markets anticipate another hike, yet in a slightly reduced capacity from the November and four preceding months’ counterparts (all of which saw a 75 BPS increase). Recent comments from Federal Reserve Chairman Jerome Powell noted that “Despite some promising developments, we have a long way to go in restoring price stability." He indicated that policy moves such as interest rate increases and the reduction of the Fed’s bond holdings generally take time to make their way through the system. “Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” he added. “The time for moderating the pace of rate increases may come as soon as the December meeting.” 

Interest rates and inflation have been the central theme of 2022, and they continue to have a tremendous impact on the multifamily real estate investment market, and most assets across the landscape for that matter. No one can truly predict where things are headed in 2023, but thus far, we've seen a seismic shift from a historic sellers market, to a market that is beginning to favor buyers. Still, we're seeing ROI expectations diminish as a result of higher costs of financing, but the few deals that are actually trading are trading for substantial discounts (in some cases 15%+ less than two quarters ago, an intriguing proposition in reduced going in basis for long term investors like us). We're anticipating some further runway in corrected values as we enter 2023, and are optimistic for the resulting acquisition opportunities on the horizon. Deals we're targeting are being projected as longer term holds (ie. 7-10 years) in an effort to optimize fixed rate debt and weather any impending economic storm. It's more important than ever to be prudent in underwriting and stress test our acquisitions, which is exactly what we're doing. To date, we've completed a deep-dive underwrite on 170 deals, and offered on 55 deals at where we feel returns are appropriate commensurate to the risk profile of the asset. We've closed 2 deals in an otherwise tumultuous macro environment in 2022, and are looking to acquire somewhere in the ballpark of 4-6 deals in 2023.

Aside from the acquisition trail, in asset management we have been focusing on the fundamentals of maximizing NOI in all of our assets through leasing, collections, and expense management. All the while our substantial renovation projects continued across the portfolio.   

Outside of the blocking and tackling of the day-to-day business, we welcomed a new Executive Assistant in Rachael Chapman, a wonderful talent with a background in the Air Force and administration in the medical field. We also were able to lend a "day of service" the day before Thanksgiving supporting prep for a meal that fed approximately 600 homeless people in the Louisville area.

Lastly, some of our team had the pleasure of attending the annual March of Dimes Commercial Real Estate Achievement Award (REACH) Breakfast Banquet at Churchill Downs, supporting families of premature babies, a cause especially near and dear to Tyler and his family after their experience in the NICU earlier this year.  

In summary, while the December month seems to get busier and busier each year, we would like to challenge everyone to take time to pause and remember the reason for the season. Express your gratitude for all the good things in your life. Take a moment to help out someone else in need. As we continue to forge greater prosperity in our lives as investors, it is our duty to pay it forward to others and make our world a better place. Instead of complaining that "they" aren't doing what you think should be done in the world, take it upon yourself to be that leader and the change that you'd like to see.  

Happy Holidays and Merry Christmas from all of us at CF Capital and thank you for being a part of our community! 

 

In Partnership, 

Tyler & Bryan 

P.S. There's no higher compliment than you referring us to your friends, family, and colleagues. We'd be honored by the opportunity to become a part of their trusted networks. Share your experience investing with CF Capital & invite others to become an investor here.

The Two Types of Inflation: What You Need to Know

Inflation refers to the rising prices of goods and services, which typically happens gradually, however, the current inflation rate is far from gradual. At the time of this writing, the country is dealing with two types of inflation: demand-pull inflation and cost-push inflation, both influencing your purchasing power. Let’s discuss these types of inflation, the conditions that cause them, and how investors like you can hedge against them.

What is Demand-Pull Inflation? 

Demand-pull inflation is the most common cause of inflation. It occurs when the aggregate demand for a good or service exceeds the aggregate supply. Sellers can meet that increase with more supply, but if the additional supply is unavailable, then the sellers can raise their prices. If something is in short supply, sellers will generally ask people to pay more for it.  

There are a few reasons why demand-pull inflation occurs, this includes: 

  • Growing economy: When the economy is booming and unemployment is low, consumers typically earn and subsequentially spend more money. This drives up aggregate demand throughout the economy, which can lead to higher prices. 

  • Government spending: Government response to economic conditions, including providing a stimulus during the economic downturn or providing tax breaks can impact how much money people spend on goods and services. When the government spends more freely, prices typically go up. 

  • Inflation expectations: Inflation expectation refers to the rate at which people expect prices to rise in the future. When consumers expect inflation soon, they tend to start buying more now to avoid paying higher prices later.

What is Cost-Push Inflation? 

Cost-push inflation is a result of supply conditions, rather than demand. It occurs when the costs of delivery products or services increase, but demand is unchanged. Cost-push inflation often happens alongside demand-pull inflation. When raw materials prices increase, then businesses raise their prices to maintain profit margins, regardless of the demand.

For example, let’s say you love steak tacos from your favorite restaurant, but the price of beef keeps going up. Eventually, they will have to raise the prices of their tacos regardless of demand. 

Another cause of cost-push inflation includes increased labor costs. This happens when there is a mandatory wage increase for production employees causing product prices to increase. Also, a work strike will likely lead to a decline in production. Natural disasters and government regulations can also make an impact. 

How You Can Hedge Against Inflation 

Inflation is a decrease in your purchasing power and the decrease in the value of each dollar in your pocket. This means it takes more money to buy the same product, asset, or investment. A growing economy will bring with it steady inflation, but economists and consumers prefer to see prices rise slowly, unlike what is happening now. When inflation increases faster than usual, consumers tend to worry about paying higher prices for gas, groceries, rent, and other products and services. 

Fortunately, there is a way to hedge against today’s current inflation, and that is investing in multifamily properties. Though any investment property can be a good hedge against inflation, investing in multifamily provides more protection due to the nature of the asset. Generally, rents reset every 12 months, and rent typically outpaces inflation. Those who live in multifamily communities are obligated to their lease, and over time the rent (and other income generated) can pay for the investment itself plus excess cash flow.  

 

Though inflation is currently rampant and at a historically high rate, you can use real estate to hedge against inflation to protect your capital and purchasing power, along with so many other financial benefits. At CF Capital, our experienced team can help you invest in the future. So, if you are ready to explore your options to passively invest in real estate, get in touch with us. 

Is Commercial Real Estate Really a Good Hedge Against Inflation?

Many experts are predicting inflation will continue to grow higher and higher. While there is uncertainty about the broader economy, it is important to apply sound economic strategies during this time and for the long haul. This has led investors like you to ask: is real estate really a good hedge against inflation? In this blog, the CF Capital team investigates this question through the lens of commercial real estate.  
 

How Does Investing in Commercial Real Estate Hedge Against Inflation? 

Inflation is one of the most significant risk factors for those looking to invest their hard-earned capital. However, commercial real estate is considered a safe haven against that insidious and sometimes invisible force. Here’s why: 

The cost of rent rises generally at the same rate as inflation. As currency devalues, average property values increase with commercial real estate—new or old—as lease renewal rates rise. Multifamily real estate, in particular, resets rent annually per resident and is generally a sounder hedge against inflation versus other asset classes in commercial real estate as a result. 

Inflation will typically increase the cost of the rent. When the rent increases, the investor’s income will increase. The higher income possibilities lead to higher sale value when selling real estate (assuming your income growth exceeds expense growth). Commercial real estate is a quality inflation hedge because of its intrinsic properties making it a compelling investment during inflation periods when prices rise rapidly. 

Benefits of Investing in Commercial Real Estate 

Commercial real estate can be a highly profitable investment vehicle. On top of that, it’s also considered exceptionally reliable regardless of market cycles since it has little correlation with stocks and bonds. Of course, all real estate is hyper-local, but generally, there are many inflation-hedging benefits to investing in commercial real estate. Investing in it is not only about generating cash flow, but also building on your own wealth over time via appreciation and tax mitigation. Here’s how:  

  • Ensures streams of cash flow 

  • Equity appreciation through NOI enhancements 

  • Allows you to utilize powerful leverage  

  • Cash flow is taxed at a lower rate than earned income 

  • Appreciation is taxed at capital gains rates, a significant savings versus earned income 

  • Improvements can be depreciated, generating powerful “paper losses” for investors 

Selecting the Best Property Type 

Here comes the question: which type of commercial property will work in the current economy and as things continue to unfold in the broader market? It depends on the specifics and your goals in particular. At the current state of the economy, investors are leading toward the safe haven of multifamily real estate. Of course, CF Capital specializes in apartment investing. Multifamily real estate has grown in popularity over the past few years because it can offer a secure and more reliable investment where there are multiple sources of cash flow coming from different tenants, and everyone needs a place to live (in a strong or weak economy). That means there will always be income, as long as the operator can meet the market. 

The market can seem unpredictable. When it comes to commercial real estate investing, including multifamily investing, it is always good to monitor the economic situation and plan out your strategy carefully. If you are interested in passively investing in quality multifamily real estate, sign up for our investor list.