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.

Capital Appreciation: Evaluating Performance of Real Estate Investments

If you are new to the world of real estate investing, it won’t take long to come across a lot of different industry specific terms such as capital appreciation. This term may seem confusing and daunting at first, but the good news is we are here to explain what it is and how to implement it in your investments.

What is Capital Appreciation?

By nature, the market value of investments changes over time with prevailing market conditions. When the value of your investment increases, there is appreciation, and when the value of your investment decreases, there is depreciation. Simply defined, capital appreciation is when the market price of real estate rises. It is the difference between the initial purchase price and the eventual selling price of an investment. It is used to determine the performance of real estate investment. It happens when the price of a stock, the property worth of a home, or the value of your real estate grows. For example, if you pay $1,000 for a stock investment and its price increases to $1,500, you could say that the investment has appreciated by $500.

Here are two important definitions that are connected to capital appreciation:

Cost Basis: Cost basis is the context of commercial real estate. It’s the original purchase price of investment property and any out-of-pocket expenses or closing costs related. Consider this scenario: you bought a rental property for $500,000 which is now worth $550,000. Sounds like a $50,000 gain, right? Not exactly. Keep in mind, during the closing you might have paid $10,000 for title insurance and another $10,000 in loan fees. This means your initial basis in property is $520,000 and your gain is $30,000.

Market Value: Market value is the sales price of a property in the market if you were to put it on the open market. Market value is usually determined by the market through a combination of comparable sales, projected rebuild costs, and the income approach. Generally commercial real estate, including large multifamily investments, are valued with an emphasis on the income approach, via the market capitalization rate derived from the Net Operating Income (NOI) of the asset.

Capital appreciation is different from income and total return. Income is the money that is paid out from owning an asset, such as operating expenses and debt service. Your total asset return is defined as a combination of capital appreciation and ongoing cash flow.

How Commercial Appreciation is Calculated

There are two ways to go about calculating capital appreciation: either by dollar amount or as a percentage.

Dollar Amount

Calculating a capital appreciation dollar amount involves subtracting the cost basis from its market value. For example, let’s say your real estate’s cost basis is $200,000 and the market value is $230,000, the formula for your capital appreciation would be:

Cost Basis - Market Value = Capital Appreciation

$230,000 - $200,000 = $30,000

The capital appreciation is $30,000.

Percentage

When calculating a capital appreciation percentage gain or loss, take the dollar amount of your capital appreciation, then divide it by your cost basis, and then multiply by 100.

Let’s take the example from above. Your basis is $200,000, your market value is $230,000, and the dollar amount of your capital appreciation is $30,000. Here is the formula:

(Capital Appreciation/Cost Basis) x 100%

($30,000/$200,000) x 100% = 15%

The Importance of Capital Appreciation

Capital appreciation is important for you as an investor to be aware of and fully understand. Every commercial real estate investor needs to consider capital appreciation when planning their investment property strategy to get the most out of their investment. Capital appreciation provides one of the best ways to make a large return on their investment.

CF Capital is here to support you in achieving your real estate investment goals. We are a national real estate investment firm that focuses on acquiring and operating multifamily assets that provide stable cash flow, capital appreciation, and a margin of safety. Contact us today and learn about our passive investment opportunities!

Multifamily Rent Growth: What to Expect in 2022 and Beyond

The current economy has real estate investors worried as interest rates have increased and inflation is having an undeniable impact on consumers. According to most macroeconomic forecasters, it seems that the likelihood of recession is much higher: the interest rate hikes have already impacted investors from making deals as they hold out until the capital markets level out. Despite the uncertainty, rental returns for properties, especially multifamily properties, have historically grown over time. The multifamily rent growth is positioned very well and is forecasted to have a solid performance.

What Does Rent Growth Rate Mean?

The rent growth rate is the expected or projected trend of the market rental rates over a particular period of analysis, usually month to month. Each year, you can determine if your rental revenue increases and by how much. Then you can compare this to the average growth rate in the area, determining how your investment property performs compared to others in the same market.

In a multifamily investment, rent growth is arguably the most important component to increasing Net Operating Income (NOI). Rent growth is the main source of profit. That’s why projecting rent growth and keeping up to date on rents compared to competitors is crucial.

History of Multifamily Rent Growth

The multifamily market remains one of the largest and most resilient among all assets in the US. The strength of the rental market has grown since the end of 2020, with more markets seeing higher rent growth in the year and a half compared with the five years leading up to the pandemic. In 2021, multifamily investors saw substantial cap-rate compression, this is largely due to the pandemic causing driven interest rates declines and increased rental rates. This caused multifamily assets to increase in value. Since the beginning of 2021, every market has experienced rent growth.

In 2022, the multifamily market has remained robust. Though COVID-19 never fully went away, Americans are getting back to the norm of working conditions, which means legal consequences of not paying rent can be enforced. Like almost every industry, inflation has impacted the costs of multifamily payroll expenses, maintenance, property taxes, utilities, and other expenses. However, the overall performance grew more than the expenses, creating a net positive impact and this will likely continue.

What to Expect in 2022 and Beyond

The multifamily rent growth market is expected to continue to grow given that housing is essential. As interest rates have increased, inflation is very real for consumers, and as the economy gets back to a “normal,” post-pandemic operating environment, multifamily investors will benefit with the demand for multifamily rentals, as first-time homebuyers need to keep renting and wait for a more favorable time to buy. Investors will produce equity in the market and cash flow.

How CF Capital Can Benefit You as an Investor

Multifamily investing remains one of the most popular and best-performing assets. At CF Capital, our team is dedicated to assisting current and future multifamily property owners and investors in executing the highest level of efficiency. If you have any questions or want to learn more, contact us today!