Real estate as a hedge against inflation: Why real estate investments offer solid protection

Are you familiar with the phrases „Money is worth less and less,“ „Everything used to be cheaper!“, and „Where is this inflation supposed to lead?“ Year after year, people complain about the loss of purchasing power. Inflation, also referred to as the „little thief,“ repeatedly nibbles away at our financial assets and causes them to dwindle peu à peu. Savers have often been the losers for years. What is interesting, however, is that tangible assets have been gaining in value for decades. That is why many investors decide to look for safe havens in real estate. They know that property values will continue to rise over time and provide a buffer against inflation.

What is meant by inflation?

Inflation is a term that describes the rate at which the Prices for goods and services are rising. It is usually expressed as a percentage and calculated by comparing the average price of a basket of goods bought in one year with the same Shopping cart is compared in another year.

Inflation is caused by a Increase in the money supply caused, i.e., more money chasing fewer goods and services. As a result, people have to spend more money to buy the same things they bought before because those things are now more expensive. Inflation occurs when the money supply increases, thereby causing prices to rise.

Suppose you have 10 EUR in your wallet. If you go to the store and find that everything there costs 2 % more than last year, you cannot buy as much with your 10 EUR as before, even though it still says „10 EUR“ on it.

In economics, the term inflation refers to an increase in the money supply. In contrast, Deflation a reduction in the money supply. Inflation can be measured, for example, by how much more expensive a product is compared to other products with similar features and similar quality; conversely, deflation can be measured by how much cheaper a product is compared to other products with similar features and similar quality. When the value of money rises, people have more purchasing power.. That means they can buy more goods and services with the same amount of money.

In January 2023, the inflation rate in Germany was 7.9 percent. The European Central Bank (ECB) sets a target of inflation rate of around two percent firmly. This is intended to encourage consumers and businesses to spend their money now rather than postponing investments. When prices rise, they have an incentive to spend their money rather than save it.

Inflation, Deflation and their Impact on Real Estate

It is important to understand how inflation or deflation affect real estate, because they can influence their value. This allows investors to make better financial decisions.

Basically, inflation is good for real estate, because the debt on a property remains constant while the actual value of money decreases. This means that the property is worth more than at the time of purchase, even though the debt is still the same. Since the nominal value of your debt remains the same and your actual debt decreases due to inflation, the value of the acquired property increases at the same time.

On the other hand, deflation can have a negative impact on real estate. While deflation increases the value of money, it also decreases the value of all other services, products, and tangible assets, including real estate value.

Protection against inflation in real estate

With real estate, the extent of inflation protection depends on how you use the property. Inflation-proof real estate is that which increases in value. It plays a role whether the property is owner-occupied or not owner-occupied.

Furthermore, there are differences between new construction properties, existing properties, and properties in need of renovation. The respective effects on inflation protection are also of a different nature.

Owner-occupied property and inflation protection

Nobody can predict today how rental prices will develop in the coming years. However, it can be assumed that a Lowering of rents in the future unlikely is. Especially in prime locations and major cities like Munich, rental income is very likely to continue to rise. In principle, tangible assets are worth more than money – and can therefore offer protection against inflation for owner-occupied real estate.
For retirement planning, real estate can be an excellent option. As an investor, you can use the income from your property to cover your living expenses or deposit it into a separate account where it grows while you continue to pay off your mortgage.

Once your property is paid off, you can use the rental income that would otherwise accrue for other purposes or to fulfill desires. This means that while operating and incidental costs increase with inflation, the value of the property increases at the same time—a win-win situation!

Capital investors like to invest in residential or commercial real estate to diversify and expand their income streams.

How inflation-protected is non-owner-occupied real estate?

If you are considering buying a property and renting it out, you should know that inflation protection looks very different than it does for owner-occupied properties. Inflation protection for non-owner-occupied properties can be tricky because it is not just about the value of the property increasing, but also about the Maintenance costs are often higher than inflation.

As you probably know, with inflation, the value of your property also increases. As a landlord, however, you experience two effects simultaneously: On the one hand, rental payments are rising, which means more money is coming in; on the other hand, however, operating and ancillary costs are also rising, and these costs can be higher than the income from the increased rental payments. Certain operating costs can be passed on to the tenant, so-called. allocatable costs. The costs for maintenance remain with the owner.

The only way to compensate for this effect is to increase rental income even further, which can be difficult, however, if the property is not in a good location. Therefore, when acquiring the property, it is important to pay attention to the Property location to pay attention to. The rents for apartments and houses in Munich have increased continuously in recent years.

In addition to this risk factor, there are other factors that play a role. For example: Supply and demand on the real estate market as well as statutory legislation (see rent control) can affect how easy or difficult it is for you to increase the rent without losing the tenant.

Furthermore, you should pay attention to a optimal lease agreement structuring ensure that you not only maintain the value of your property, but also increase it.

Inflation protection for new builds and properties in need of renovation

As a rule, are suitable newer real estate better for inflation protection than properties in need of renovation. The reason for this is that newer real estate has a greater chance of being sold at higher prices in the future and thus avoiding capital losses. If, on the other hand, a property is in need of renovation, the inflation protection can turn into its opposite. This is due to the incurred renovation costs that must be factored in.

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Is investing in real estate a good way to protect against inflation?

If you are looking for a way to protect yourself against inflation, real estate could be the answer.
Real estate investments can be an effective hedge against inflation if you follow a few basic steps in your search. First, it is important to understand that the value of a property depends on a number of factors—not just location. In fact, many factors contribute to the overall value: the condition of the property and whether or not it is in need of renovation, supply and demand in the market, and even the type of property (e.g., owner-occupied or rented).

Generally speaking, however, well-maintained properties are more likely to retain their value over time. If you are considering investing in real estate as a hedge against inflation, it is important to think about whether your property will be able to maintain its value over time—and what conditions might affect its ability to do so.

Impact of inflation phases on real estate loans

Inflation is an important factor when it comes to financing construction projects and real estate. As a real estate borrower, you may be wondering what impact inflation has on your existing mortgage financing. In principle, you can benefit from rising and sustainable inflation because the real value of your debt decreases. However, the positive impact depends on various factors.

Why variable-rate loans offer no advantages when inflation is rising.
If you a variable loan completed, in which the interest rate is adjusted several times a year, you do not benefit from rising inflation. Because the financing bank will generally tie the construction interest rates to the inflation rate adjust.

Annuity loan: Why high inflation can be a blessing

If, on the other hand, you Annuity loan chosen to finance a property for personal use, you can benefit from high and persistent inflation. This is because the financing bank also takes the expected development of inflation into account when calculating the interest rate.

If inflation rises higher and longer than expected, your debt will be depreciated more, which has a positive effect on your construction financing. However, the positive effect also depends on your income. If your salary is not adjusted quickly to the rising inflation, you will have to spend more money on your living expenses and the positive effect could „evaporate.“.

Why real estate as an investment benefits from inflation

If you own a property as an investment, you benefit even more from rising and sustainable inflation. This is the case if you enter into an index-linked rental agreement with your tenants, in which rental income is pegged to the consumer price index. If the CPI rises, the rent increases in the same proportion and with it your income. At the same time, the devaluation of money devalues your debts, which makes your construction financing cheaper. However, landlords are only allowed to make one rent increase per year.

So overall you can as Real estate borrowers benefit from rising and sustainable inflation, if you right type of loan have chosen and your income increases accordingly. However, if you have a variable-rate loan and your income does not keep pace with rising inflation, the positive effect on your mortgage financing could be small. Our financing partners ensure that our customers get the best possible financing for their project. Do not hesitate to contact us contact and get non-binding advice.

Summary on Real Estate Investments and Inflation Phases

The most important factor in determining whether an investment is suitable for inflation protection is the current market situation. For investments designed for long-term use, such as houses or commercial buildings, the area must exhibit good long-term prospects and a stable economy.

Real estate investments are considered an „asset class“ because they are regarded as a safe investment during times of economic uncertainty, such as recessions or other economic downturns.. They offset currency depreciation. In addition, they offer investors higher returns than most other asset class returns, which can help offset the impact of rising interest rates and inflationary periods. Although there are no guarantees in investing, real estate as an inflation hedge can keep you ahead of the game. Real estate can protect against inflation or even profit from it.

FAQ – Frequently Asked Questions about Real Estate and Inflation Protection

Do rents rise in the event of inflation?
Rents are paid as monthly loan installments. If a property purchased for rental purposes was financed by taking out a loan, the monthly loan installments are indirectly paid by the tenant. If prices and loan interest rates rise due to inflation, a higher rent for the leased property may also be demanded under certain circumstances.. This means the tenant would incur inflation-related additional costs. It is important that the drafting of the lease agreement current case law considered and a rent increase is possible. However, it is important to know that a rent increase is not automatically possible with certain types of rental properties. For example, if the landlord is bound by the rent control cap (Mietpreisbremse), they cannot always increase rents in the event of inflation. In this case, it is advisable to speak with an experienced real estate agent before renting out the property, who can comprehensively inform you about the structuring options for a tenancy agreement. This is how you ensure that your capital investment pays off.

What other investments can be useful against inflation?
Inflation is a serious problem for investors, but there are alternatives to protect your money. A suitable option is investing in stocks, bonds, and other financial instruments that allow you to make money in the face of inflation.

Do real estate funds pass the inflation test?
Real estate funds are a popular investment in tangible assets and, just like real estate, offer a certain degree of protection against inflation. Another advantage is that part of the returns remains tax-free, thanks to what is known as partial tax exemption. If the fund has a real estate quota of at least 51 percent, a partial tax exemption of 60 percent is granted on the returns. For funds with a lower real estate quota, this tax benefit does not apply and all returns are 100 percent taxable.
It is advisable to consult an expert in advance in order to make an informed decision.

What are possible crisis-proof investments?
In times of economic turmoil, the question of safe investments often arises. These are investment options that are less influenced by economic fluctuations. Examples of this include tangible assets such as real estate and precious metals.

To our popular Real estate guide for sellers, buyers and landlords.