Everyone’s feeling the pinch these days as the cost of living soars. But, as an investor,
paying more for your groceries may be the least of your worries, as inflation could be silently eating away at the value of your investment returns.
Think of inflation as the enemy of long-term investors, as it decreases the purchasing power of your dollar. That’s because prices for goods and services go up when inflation rises. So a dollar buys you a little bit less as time goes on.
In Australia, inflation is measured using the consumer price index, or CPI. The CPI track show the weighted average of the prices of a hypothetical basket of essential goods and services changes over time.
A little bit of inflation is a good thing, as it is a sign of a healthy economy. However, when prices rise too quickly, it can slow economic growth as consumers’ purchasing power gets hit.
Over the March quarter, annual headline inflation jumped by 5.1% – a 20-year high.
However, many experts are predicting inflation will get worse before it gets better, with the Reserve Bank of Australia warning headline inflation is likely to hit a high of 7% by the end of the year.
For many investors, an inflation rate as high as that will likely diminish your investment
returns, making it more challenging to enjoy a strong return.
But here’s the thing … passive income property isn’t like most investments.
Three reasons why real estate is a great hedge against inflation
Many experts consider income-generating investment property as a safe haven during
periods of higher inflation for three reasons.
- Firstly, inflation reduces the value of your home loan debt, so your mortgage costs less over time. That’s because you’re paying the lender back with money that’s worth less than when you originally borrowed it.
- Secondly, there’s rental income – which, all things being equal, typically keeps pace with inflation as landlords can raise rents to cover any increases in their costs. What’s more, if you buy a quality positively geared property, your rental income will be more than your expenses. So an inflationary environment, such as now, can lead to more positive cash flow – as your rents will likely rise higher than your costs.
- Finally, real estate is considered a great hedge against inflation because property values have historically risen in value over the long-term, despite occasional short-term fluctuations.This property price growth has exceeded inflation.
Looking for a positively geared property that brings in more investment income than it costs to run?
Best Yield Investment Property Experts High Income Property can help. Schedule an online meeting here or call (02) 8007 4001.