A report by the Bureau of Labor Statistics reveals that the consumer price index rose by 7% in December, the eighth consecutive month in which the inflation rate is greater than 5%. Economists say that these numbers will continue to rise in 2022.
As commodity prices increase with inflation, so do real estate prices. Property investors must ensure that their assets yield higher returns than the current or predicted inflation rate in such scenarios.
Commercial real estate (CRE) investments surged in popularity for this reason. Its consistent cash flow provides investors a good hedge against inflation, and this article explains how.
Rental Income Increases with Inflation
As established, rising inflation leads to rising prices – this includes rental rates for commercial properties. An increase in rental rate will hold positive value for CREs as long as operating expenses remain constant.
Moreover, as net operating income increases, the property value will follow suit. As long as this value outpaces the inflation rate, the investment will not be eroded while holding CRE assets.
CRE Leases Ensure Regular Rent Increase
To protect against inflation, CRE leases warrant an annual rent increase. For instance, a lease agreement could call for a 2% to 3% increase in rental rate per year. The increase is usually tied to a third-party variable like the CPI – as the index rises so will your rent and income.
As long as the increase is higher than the current inflation rate, returns will remain positive on a relative basis.
Property Scarcity Equals Price Increase
As more properties are built to meet the increasing demand of the real estate market, scarcity of space becomes more evident. High demand and limited supply equate to the appreciation of real estate value, something that investors look forward to.
And as long as the price increase outpaces the inflation rate, the return on investment stays positive.
How to Start Investing in Commercial Real Estate
If you want to dabble in commercial real estate, there are three ways that you can start:
Buy Real Estate Investment Trusts (REITs)
REITs are companies that buy, manage, or finance income-generating real estate. They lease spaces then distribute the rental income as dividends to shareholders. The downside to this is that you can’t choose the individual assets you’re investing in.
Fractional ownership makes investing in high-value properties more affordable. This method involves selling shares of the asset to multiple investors. The shareholders will then benefit equally from the property, with income sharing, usage rights, and priority access.
This can be an excellent way to diversify your portfolio. Plus, you can choose the property or properties that you want to invest in.
Direct Buying of Commercial Real Estate
You also have the option to purchase CREs directly. However, this may not be ideal for rookie investors as it can require in-depth market knowledge. Plus, you’ll be handling all aspects of the investment, from legalities to operational charges.
Make the Most Out of Your CRE Investment
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