Which real estate investment vehicles can offer a potential inflation hedge?

Edward Fernandez founded 1031 Crowdfunding in 2014 and has more than 20 years of experience in sales, real estate and investments.

As we face an inflationary environment unlike any other in the last 40 years, investors are concerned about the potential impact. Inflation can have many causes, but I think supply chain issues and interest rates are the main ones to focus on right now.

The reality is that when supply chains are insufficient to meet demand, it inevitably results in higher prices. Current supply chain issues have been primarily impacted by the pandemic, with widespread shutdowns initially causing massive suppression of demand for goods and services. As closures waned over time and demand soared, previously efficient supply chains proved far too slow to ramp up to meet them.

The interest rate issue is just as crucial, with the big question now of how high the Federal Reserve will raise interest rates to try and cool inflation. If the Fed pushes too hard we could end up in a recession, so there’s a good balance to consider. The central bank has already started a series of hikes in Federal Funds interest rates, including a rarely seen Increase of 75 basis points in June. The subsequent report of dazzling 9.1% inflation in June for that month sparked speculation that the Fed is experiencing a historic July 100 base point hike. In the end, the central bank decided on a new increase of 75 basis points. However, it should be noted that the measures taken in June and July were the most significant increases since the early 1990s.

Personally, I don’t see interest rates going down for at least another year. Until then, we will likely continue to face high prices for gas, food, water and energy. But an interesting feature of today’s economy is that people are also paying more for rent, so property prices continue to rise.

How does real estate continue to appreciate in value, and how much higher can it go as rents and cash flow try to keep up with inflation? I honestly don’t have an answer to that question. If I did, I would probably own a 200-foot yacht and plan to dock it in Monte Carlo for the next Monaco Grand Prix.

Identifying opportunities

Amid this intriguing real estate market and rapidly rising inflation, are there any investment vehicles that could provide a hedge and provide investors with cash flow to help offset rising prices elsewhere?

To answer this question, some investors are focusing on asset types that were hit hard by Covid-19. These include student housing as many students did not attend school during the closures, along with senior housing as many elderly Americans have sadly died as a result of exposure to the coronavirus. The pandemic has caused a flight of asset types like this one, which have now become assets of opportunity that I’ve observed typically offer better cap rate or cash flow than multifamily or self-storage investments.

As we are just coming out of the pandemic, some people still see a high risk of future closures and are concerned about the impact on student or senior housing. I think those investors who can mentally break free from those “what if” concerns will benefit from the better opportunities and returns that these asset types currently offer.

What Investors Should Consider

While I believe that senior housing and student housing are both generally attractive investment options right now, there are pros and cons to keep in mind.

The main advantages of investing in senior housing are that it is need-based, relatively recession-proof and has growth potential. There will always be people who have to live in a senior citizen’s home, which under normal circumstances has to keep many facilities open. And even in a down market, investors can monetize the rent payments, whether private or government-subsidised. In addition, as the massive baby boom generation grows older and people live longer, there will be a greater need for new senior housing facilities. The potential risks of investing in senior housing include high operating costs, location considerations, resident health and regulatory changes.

In terms of student housing, the main advantages are high demand, industrial stability, diversified revenues, reliable payments, flexible rates and profitable returns. The almost certain demand for higher professional education courses makes this investment a stable choice for the long term. In addition, because parents often stand surety for a student’s lease, payments are usually reliable. Students can also use financial aid to cover rent, while the steady flow of tenants cycling in and out means that student housing can easily raise rates to meet market conditions. Meanwhile, potential risks of investing in student housing include high turnover, property maintenance, safety and liability issues, and seasonal vacancy.

Focus on cash flow

The investment industry is mostly cash flow driven at the moment. In addition, older investors involved in real estate typically have built up their wealth and want to protect it.

Adding real estate to a portfolio can help create a diversified portfolio with assets that hedge against inflation. Investors often look to vehicles such as Delaware Statutory Trusts (DSTs) and Real Estate Investment Trusts (REITs) to access these types of assets on a smaller scale to have a non-market correlated long-term investment as an opportunity to take advantage of the current surroundings. (Disclosure: My company works with DSTs and REITs.)

So the goals I suggest investors pursue are in the following order: 1) protect principal, 2) provide decent cash flow, and 3) provide potential valuation. Investors seeking head protection and access to solid cash flow situations are therefore looking closely at student housing types or senior housing/behavioral health assets. Appreciation is generally an afterthought, and they are fine with it if it doesn’t, because the other two considerations are paramount.

The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation.


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