As the prices of goods increase, central banks, like the US Fed, raise the prime interest rate to combat rising prices.
Those rising rates are crucial in determining what the consumer borrowers will pay back when rates are higher. The reason is that lending institutions like banks are charged more to borrow from the central bank and pass those costs to consumers.
Inflation significantly impacts most markets, including the real estate market.
As inflation increases, so do home prices.
This is because of the increased cost of goods and services, which drives the cost of construction materials and labor.
In addition, when inflation rises, people tend to invest more in real estate as a hedge against rising prices. This increased demand for housing further drives up prices.
Did you know that over the last 10 years, the value of a typical middle price tier single-family house in the U.S. has increased nearly 30% (based on a 4-7% yearly appreciation)?
Looking forward, you can safely forecast that home prices will rise by 13.6% over the next year. This is true even though reports of housing prices coming down are in the news.
This shows that inflation is increasingly positively affecting real estate values and that investors continue to pour money into this asset class to protect their wealth from rising prices.
Real estate is often seen as an attractive income-generating asset for investors, especially during inflation, because real estate investments can generate a yield that exceeds the inflation rate.
For example, rental income from tenants is used to pay for operating expenses, property taxes, and the mortgage.
Any remaining money at the end of each period is the return on investment, which is expressed as a capitalization (cap) rate. The cap rate is calculated by dividing a property’s net operating income or NOI by the property purchase price.
Single-family rentals (SFRs) currently have average cap rates of 5.8%. In comparison, some rental homes listed for sale on the Roofstock Marketplace have projected cap rates of 7% or more.
By comparison, cap rates on multifamily properties are about 5%, the 10-Year Treasury yield is around 1.5%, while high-yield savings accounts offer an annual percentage yield of 0.60% or less.
As such, real estate investments can be a great way to generate income and protect against inflationary pressures in the long run.
Income Generated From A Real Estate Asset
You’ve just bought a property and are ready to earn an income.
But how exactly do you generate income through real estate? In this article, we’ll take a look at the five most popular methods of generating revenue from your real estate asset.
Rent It Out: One of the best ways to make money from a real estate asset is to rent it out. You can attract tenants with proper marketing and then set the rates accordingly, depending on the demand in your local area.
Fix and Flip: With a fix and flip, you look for a motivated seller and buy below market value before putting some time and money into making improvements on the home before reselling it.
It’s simple, really, you just need to know how to buy abandoned houses or find an extremely motivated seller (obituaries, loss of income, etc.) that are interested in selling.
After, you either do the work yourself, hire someone out, or simply resell the property to an investor that is a professional at flipping homes.
Sublease It: If you need short-term cash flow, subleasing may be your option.
Subleasing involves finding renters who agree to lease part of your property for a certain period, typically shorter than the full-term rental agreement.
This method only requires a little effort as long as you find trustworthy tenants who are willing to pay their dues on time each month.
Lease-to-Own: Lease-to-own agreements have become increasingly popular among investors and tenants alike in recent years because they allow buyers to get into their dream homes without having to shoulder the entire cost upfront.
Under this model, tenants enter into a contract wherein they agree to lease the home over a fixed term while also making periodic payments towards eventually owning it outright when the contract expires.
Property Management Services: For those who want to free themselves from dealing with day-to-day rental issues but still make money on their real estate property, several companies offer property management services that allow owners to focus on more profitable pursuits.
At the same time, someone else takes care of all the maintenance and tenant communication duties.
These companies handle everything from collecting rent payments to handling evictions and will usually offer lower commissions than other rental models if contracted long-term.
Real Estate Investment Trusts (REITs): REITs are worth considering if you don’t want or need any involvement in managing a physical property but still want exposure to real estate investment profits.
REITs allow investors to access large amounts of securitized ownership in multiple properties while only having one point of contact – usually someone certified by FINRA (Financial Industry Regulatory Authority).
This option is ideal for those who wish unencumbered involvement with their investments but want to avoid any direct contact with tenants or property managers too!
Real estate wholesaling: Finally, ask yourself if you’re interested in making money by investing in real estate without spending a fortune.
Real estate wholesaling is a popular investment strategy allowing investors to make money quickly.
Wholesaling is a process where you act as a middle person that brokers a sale between a motivated owner and a secondary buyer.
Much like flipping homes, you need a system that lets you find motivated sellers, hone your wholesale script, and set up the deal.
Often you’d want a secondary buyer, typically an investor, to be already lined up. The practice is based on buying low and selling high, earning a profit upon the sale of each property generated.
Real estate wholesaling is a great way for new investors to learn about the industry and generate income on an ongoing basis.
Whether you are new to real estate or have been involved in it for some time, understanding the basics of real estate wholesale can be beneficial in achieving your financial goals.
