How I’ve Beaten Inflation

A customer shops for meat at a Safeway store in San Francisco, Calif., on Oct. 4, 2021. Justin Sullivan/Getty Images

Commentary 

Inflation is here, and it’s breaking records. Currently, the inflation rate in the United States is 7 percent, the highest it’s been in 40 years. The spike is the result of a perfect storm of economic factors: a massive cash infusion into our economy combined with high demand for consumer goods and persistent supply chain issues.

In the early 1980s, during a period of similarly high inflation, President Ronald Reagan said, “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” I tend to agree. In periods of high inflation, it’s a challenge just to maintain the value of your assets. Even savings accounts can’t provide protection from inflation. While most people assume that they offer modest yet stable growth, inflation actually cancels out any interest. In fact, putting your money in a savings account is a great way of losing money.

According to the Federal Deposit Insurance Corporation, the national average interest rate on savings accounts stands at 0.06 percent annual percentage yield. In practice, if you were to invest $100,000 in a savings account, your interest after a full year would be only $60. Let’s assume that inflation stays at 7 percent for the year. The buying power of your $100,000, would drop to about $93,457 after sitting in your savings account for a year. Essentially, you’re putting your money in savings just to lose it.

How to Outperform Inflation

The good news is that you aren’t totally at the mercy of inflation. For over thirty years, I have been investing in rental properties and I have seen firsthand how rental properties can act as a hedge against inflation.

My strategy is pretty simple. I build new multifamily properties or acquire existing ones that offer opportunities to add value that will increase the rent. When I’m evaluating a potential acquisition or a new build, I always go through the numbers meticulously to ensure that there will be cash flow every month. The monthly revenue—the rents that tenants pay—has to exceed all monthly expenses. The expenses include everything we spend in a given month, including the mortgage, property taxes, maintenance, and management fees. I itemize everything, down to the paperclips in the property manager’s office.

Some of you may be surprised that I included the mortgage on the property in the list of monthly expenses. After all, if we’re talking about hedging against inflation, how could that include taking on debt? It may seem surprising, but debt is actually how I’m able to beat inflation. The key is that it’s fixed debt. The mortgage is the greatest monthly expense, and keeping that consistent year after year is a major component of beating inflation.

While my debt remains fixed, inflation continues to drive up the cost of housing. This has been especially evident in the past two years, with housing prices increasing well above the more modest increases we’re used to seeing. Working from home has led to unprecedented migration. Huge numbers of people relocated out of pricier markets and into smaller markets like Boise, Tucson, and Denver, which all saw double-digit year-over-year increases in home prices. In fact, it’s difficult to name a U.S. city in 2021 that didn’t see a huge jump in home prices. As realtors in these markets can attest, multiple cash offers, bidding wars, and houses going into escrow the same day a “for sale” sign was placed on the front lawn all became the norm. Currently in the United States, there’s a shortage of approximately 5.24 million homes, an increase from 2019, when the gap was about 3.84 million.

That unmet demand has created a ripple effect in apartment rentals. With over 5 million homes needed to meet demand, all of those would-be homeowners have to keep renting until they’re able to buy. In Phoenix, Arizona, which has been attracting tens of thousands of new residents every year over the past few years, the average monthly rent increased from $1,473 in September of 2020 to $1,787 in September of 2021, according to the Zillow Observed Rent Index. If you think that’s a dramatic increase, the difference is even greater if you look back to 2016, when the average apartment in Phoenix rented for about $1,100. As a rental property owner, if you were turning a profit on $1,100 per month, just imagine how much more you’d be profiting with tenants paying you almost $700 more per month. Phoenix is not an outlier. Nationwide, one-bedroom apartments saw a 21.3 percent year-over-year increase in asking rents in 2021, while two-bedroom apartments went up by 16.7 percent.

To be clear, most experts expect that these runaway housing costs won’t continue to increase at the same annual rate, but they will continue to go up. Since 2000, the median rent has increased an average of 4.17 percent every year. If you’re a rental property owner, those annual increases will enhance your cash flow, especially with your debt remaining fixed. The reality is, whether inflation is high or low, if you’re charging market value for your rents, you’ll always stay ahead of inflation.