The United States’ current inflation rate is about 8.3% this month. This is the most significant jump in consumer prices since 1981. Inflation affects everyone, no matter what industry you are in.
How Inflation Impacts Real Estate Investors
Inflation can affect real estate in many ways. First, the cost of building a home is higher than usual. The materials and supplies cost more, and the wages are also high. As an investor, you may have trouble finding reasonably-priced rental homes. Expanding your rental business could also be more difficult. Second, inflation increases your interest rates. Borrowing from the bank becomes more expensive than usual, making it difficult to finance your deals. Third, we’ve seen inflation increase the demand for rental housing due to difficulty buying for many first-time home-buyers. Since demand is higher now than usual, so there’s less chance of extended vacancies. However, this doesn’t mean investors cannot do well during tough times. After all, real estate investment primarily relies on property location and the housing market. Here are a few rental property investments for landlords to consider during periods of inflation.
1. Primary Residence
If you already own a home, you are in a good position. The benefits of homeownership are pretty evident in times of inflation. Inflationary times increase prices all through the economy. This means that the value of your home will increase as well. Having locked in your mortgage payments for the next few years, you are immune to the rising costs due to inflation. Renting out your primary residence for a short while could be a good option to yield profits if your situation allows for it.
2. Traditional/Long-Term Rentals
These are dwelling places that you lease out for an extended period. An example of such rentals is a single-family home. These rentals act as the primary residence for most residents. Therefore, they are always necessary, regardless of whether it’s an inflationary period. This is why they are likely to yield consistent returns even during uncertain times. Investing in long-term rentals demands you set aside a budget for repairs, regular maintenance, insurance, and property taxes. It would be best if you also planned for ways to manage your property. If you invest in the right long-term rental, it should pay for itself through rental income. You will also benefit from the property’s value appreciation.
3. Vacation/Short-Term Rentals
Short-term/vacation rentals work similarly to hotels. They offer temporary accommodation and are typically rented for 30 days or less. As the property owner, you must provide furniture and other amenities. Websites like Vrbo and Airbnb are great for listing your rentals. Depending on location, short-term rentals can bring in better returns than traditional rentals. However, the profits come at a cost. You will need to employ hands-on management and have additional daily costs. If you have short-term rentals, you are in both the real estate and hospitality industries. It would be best if you learned to navigate both of them. Pro tip: Understand your local limiting regulations and laws for short-term rentals in your target area before investing in a vacation or short-term rental. Regulations for short-term and vacation rentals are typically not the same as the laws for long-term rentals. Therefore, always reach out to the HOA and/ or municipal body in that jurisdiction before making the decision.
Increasing Rent During Inflationary Times
While rent increment may be normal, it can be alarming for landlords and residents. If you already have a good resident, DON’T risk losing them to make more money in the short term. But, if you must increase rents, here are a few things to consider:
1. Determine the Cause
The first step is to consider the main reason for increasing your rent. This way, you can establish exactly how much you need to raise and how often you should do it. Determining the cause of the increase also makes it easier to explain it to residents. Here are a few rising costs to pay attention to:
- Utility costs
- Maintenance fees
- Property taxes
- Insurance premiums
2. Include Rent Increment Into Your Lease
If you find yourself between residents during this period of inflation, add a clause to your lease stipulating when the rent will go up and by how much. Raising the rent slowly and predictably makes your residents more open to the idea. Since they will know about it when signing the lease, you can avoid unpleasant surprises. Slow but consistent increases save you the trouble of making significant increases at once.
3. Research Local Properties
Wanting to increase your rental prices doesn’t mean that you should. It would be best to consider the properties in your local area and what they are doing first. Do some research and come up with the average rent for properties like yours. You don’t want your increment to go beyond the market rate. You would also be wise to consider vacancy rates in your area. If you realize that similar properties are staying on the market for too long, it is probably not the best time to raise your rent.
4. Give Sufficient Notice
If raising rent is the best option for your property, remember to give your residents enough notice of a rent increase. Depending on where you live, you have 30-90 days before their basic lease agreement expires.Like with any other business, your residents need to come first. It is impossible to keep your residents if you don’t treat them fairly. Giving them enough notice offers enough time to decide whether they will renew the lease.
Rentals Are Great During Inflation Periods
Even with the cost of goods and services being higher than usual due to inflation, rental properties provide a great resistant asset and long-term investing strategy. And although owning rental properties can be a great way to bolster your finances and supplement your income — a significant amount of work is involved, and you must manage them properly. If you’re looking for a property management company to manage for you, contact us today and start the conversation. >>