Inflation is an economic indicator that indicates the rate of rising prices of goods and services in the economy. Ultimately it shows the decrease in the buying power of the rupee. It is measured as a percentage.
This quantitative economic measures the rate of change in prices of selected goods and services over a period of time. Inflation indicates how much the average price has changed for the selected basket of goods and services. It is expressed as a percentage. An increase in inflation indicates a decrease in the purchasing power of the economy.
This percentage indicates the increase or decrease from the previous period. Inflation can be a cause of concern as the value of money keeps decreasing as inflation rises.
Who Benefits from Inflation?
Inflation being a cause of concern for the economy, doesn’t affect everyone in a bad way. It is a boon for a certain set of people. While consumers lose a part of their purchasing power to inflation, investors gain from it.
Investors investing in assets affected by inflation, if held on for a long time will certainly benefit from it. For example, an increase in housing prices might affect consumers. However, those who have already bought a house will benefit from capital appreciation.
Here are six of the best investments that you can make during times of high inflation. Most of these options are generally solid investments but can be especially safe during inflationary times.
Real Estate
Real estate offers dynamic cash flows.
Unlike traditional bonds that generate fixed cash flows, the income streams from real estate can rise over time. Prioritizing your assets with shorter lease terms in sectors with strong underlying growth fundamentals can translate higher market rents into underlying operating cash flows faster.
Hotels effectively have one-night leases. Other sectors, like apartments or warehouses, also tend to have a shorter duration lease. Certain assets with longer-duration leases, such as net lease properties, often include contractual rent escalators to mitigate inflationary risks. Cash flow from real estate should be an investor’s primary consideration when they are considering buying rental property.
Lock in Long-term Fixed Rate Financing
This is where the small private investor actually has a huge advantage over the large investment firms. Interest rates are going to rise, but a well-qualified investor still has time to lock in a low 30-year rate. Now is a great time to buy new investment properties, or tap existing properties for equity and lock in a low rate. Mortgage payments do not change over time, but inflation means the money paid back in the future is worth less. As equity grows, fixed-rate payments stay the same.
Today’s low interest rates will further amplify the down payment multiplier. Real estate is one of the very few places where you can lock in a 30-year interest rate. Next month (or next year), the interest rate will be higher to compensate lenders for the rate of inflation. A higher interest rate means higher monthly payments which will reduce your total gain over the next 20 years. You’ll gain all the appreciation but less of the inflation multiplier.
The way you maximize the inflation edge today is by locking in a low mortgage rate for the next 30 years before interest rates rise. Specific to real estate, inflation is going to drive both higher mortgage rates and higher property values.
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Invest in Properties with Shorter Term Leases and Steady Rent Increases
Rental properties are without a doubt among the most profitable assets during inflation. As more people steer away from loans and begin investing in traditional rental properties, real estate investors will are able to capitalize on the trend by charging more for rent. The high rental income coupled with the low vacancy rates in New York, helps generate a very high return on investment for landlords.
More importantly, investors who have a fixed-rate mortgage can put this high income toward servicing their debt in a quick and efficient manner. Inflation means rising prices. Everything from fuel, food, goods, and services will see rising costs over the next couple of years. Rents will also increase. Lessees locked into long-term contracts will be at an advantage. Granted, most of these leases have annual rent increases built into them, but the increases are typically modest compared to what inflation rates will be for the next couple of years.
Landlords that can renew leases annually will have an advantage. Commercial leases are usually five to ten years, or even longer, in length. Residential properties have relatively shorter one-year leases. Landlords of residential properties will be able to raise rents along with inflation, while commercial landlords will not.
Focus on Newer Properties with Fewer Capital Needs
Construction and renovation projects are going to see rising costs as both labor and materials see price increases due to inflation. Buying a major fixer-upper may suddenly get extremely expensive. Rising lumber prices had been in the news at points during the pandemic, but steel, copper, and cement have also seen significant price increases. Rising material and labor costs may make your renovation or construction project too expensive to complete.
A newer property that does not require major renovation or maintenance will be much more profitable as we head into this inflationary period. Wait several years for prices to come back down, and these fixer-uppers may be a golden opportunity, but for now one should stay away. In an inflationary period, building supply costs tend to increase. Lumber, concrete, steel, appliances, wiring, and all the other materials necessary to build a home cost more. In these situations, rents typically increase, meaning landlords can generate more income. And, this rent increase is compounded by affordability issues.
It’s easy to fall in love with your favorite properties when getting involved in real estate investing. No one knows that better than me. I love real estate and I know people reading this do too, whether this is your career or you just dabble on the side. Staying disciplined and putting some of those feelings aside is crucial when deciding on what properties to buy. To be a successful investor, you need to stay ahead of both the market and economic trends. Working with a broker to help with the financial modeling for future decisions can prove to be integral. Profitable properties belong in your portfolio, and you can always put your favorites on a Pinterest board.
Savings Bonds
Savings Bonds are one of the most preferred investment options for people looking for a fixed-income source. These bonds are convenient to invest in and offer a 7.75% interest rate for the amount invested. These bonds are open for investment to resident individuals and Hindu Undivided Families.
Savings Bonds are guaranteed by the Government of India:
Savings Bonds have a sovereign guarantee. This means the Government is obligated to return the amount you invested on maturity. This makes the 7.75% Government of India Savings Bond a very safe investment option. If you are wondering are Savings Bonds safe, then the answer is yes. These bonds are one of the safest investment options today.
Savings Bonds have no maximum investment limit:
The minimum investment for a Savings Bond is Rs. 1,000. This can be increased in multiples of Rs. 1000. There is no maximum limit of investment. Investors can invest any amount in the Savings Bonds without any problems. It is possible to invest any amount at any time till the time the subscriptions are not closed.
Savings Bonds have 2 options for interest:
Investors can choose between cumulative and non-cumulative options. In the cumulative option, interest is paid out on maturity. The cumulative maturity amount is Rs. 1,703 for an initial investment of Rs. 1,000. Under the non-cumulative option, interest is paid out every six months in the bank account of the investor.
Premature redemption depends on the age of the investor:
Premature withdrawal is allowed, but it depends on the age of the investor. For senior citizens between 60 to 70 years, the lock-in period is 6 years. For investors between 70 to 80 years of age, the lock-in period is 5 years and for investors above 80 years, the lock-in period is 4 years. After that, it is possible for these investors to withdraw their money.
Bonds or debt funds that invest in bonds are linked closely to interest rates in the economy, which works closely with the inflation rates.
If inflation rises, interest rates rise. Interest rates and bond prices move in opposite directions. Hence bond prices will fall in this case.
Stocks
Stocks are one of the most common investments. While you might become a billionaire, you might also lose a lot of money by making bad investments. Buying stocks is the riskiest option on this list, but the potential gains make it worth talking with a brokerage firm or investment trading company.
The key to investing during times of high inflation is to look for options where consumers can offset the higher costs. For example, utility stocks commonly pay dividends to their shareholders that can provide you with passive income.
The profits are less susceptible to market instability. Rising costs typically mean rising prices for consumers, so profits are almost always in the black.
Another solid investment strategy is to get involved with a stock index fund. These options are available as mutual funds or exchange-traded funds (EFTs) and follow a specific index such as the S&P 500 or Nifty 50. The money you use to purchase your index fund is used to invest in all the companies involved with that specific index.
Your fund will be highly diversified, which can significantly mitigate the risks during inflation. Plus, you’ll be able to get involved at a much lower cost than if you wanted to buy individual stocks in each company.
Silver & Gold
Silver and gold are precious metals that have been used as currency as a means of exchange for centuries. The U.S. dollar was backed by gold until August 15, 1971, when President Nixon officially abandoned the gold standard. In the decades since silver and gold have remained strong investments for many people.
The best time to buy silver or gold is when the currency is losing value during times of inflation. When the dollar weakens, commodities become more expensive (more on that later).
Historically, silver has performed better than gold during inflation. However, gold is the more expensive option and roughly 70 times more expensive than silver. It might be a good idea to invest in both to help hedge your investment.
You’ll have two options for investing in silver and/or gold: to physically buy some or invest in ETFs that track them. Physically purchasing silver and gold can be risky unless you know what you’re doing.
Commodities
As mentioned earlier, the price of commodities typically increases dramatically during periods of higher inflation. This creates a unique investment opportunity that can be extremely lucrative when handled correctly. However, it’s important to note that the price of commodities is determined by supply and demand. It’s just as possible that you could lose money by investing in commodities.
The key to investing in commodities is timing. Raw materials such as oil, natural gas, grain, beef, coffee, cotton, soybeans, and copper have all experienced an increase in value over the last few years.
In particular, the price of oil skyrocketed after the Russian invasion began in late February 2022. A lot of people made a lot of money by investing in oil as a commodity just before prices jumped.
The same was true for the price of wood. The supply chain for wood and other building materials was severely disrupted by the pandemic. However, the demand stayed roughly the same. As a result, the price of wood skyrocketed, and shrewd investors were able to make an enormous profit.
Unlike silver and gold, most other commodities have an expiration date. It would be ludicrous to purchase a ton of avocados and attempt to sell them for a profit. Look into ETFs that track specific commodity indexes. You can safely experience the potential windfalls of a price increase without the risk of being stuck with expired commodities.