(Forbes) - When it comes to investing in real estate, it’s important to be smart about it. With inflation on the rise, now is not the time to overspend or make rash decisions. Instead, take a look at your budget and see what you can realistically afford. If you’re looking to invest in a property, be sure to do your research and know what you’re getting into.
There are still plenty of good deals out there, so don’t be discouraged. By being strategic about your investments, you can make a wise decision even in these uncertain times.
Steps to Invest in Real Estate Amid High Inflation
Researching a Property
In general, the first step with any real estate investment is research. This means looking at the property itself, as well as the surrounding area. Key things to remember include legal due diligence, making sure all the paperwork is in place and performing a good recce of the infrastructure in the area. There are a number of online tools that can help you with this research. You can also talk to a real estate agent to get more information about a specific property.
If you have the option, also think about investing in different types of properties across different locations. While diversifying your portfolio, it will also help you bear even less risk if any of the areas suffer from stagnant demand at any time.
Understanding the Marketplace
When looking at assets to invest in, take a good look at the marketplace. Is it a seller’s market or a buyer’s? In times of high inflation, the economy is usually riding on a high and it is possible that properties are being traded for rates far higher than they are worth.
Take time to do the math. If you bought the property, what’s a reasonable rate you could lease it out for? If the rental yield is too low, then you spent too much on the property.
An alternative to deploying all your money in a single property is to opt for Real Estate Investment Trusts (REITs) or fractional ownership. There is one major downside to REITs in the sense that you do not get the choice of your preferred property. In fractional ownership, you can choose how much to invest in any property of your choice.
The Cost of a House/Commercial Real Estate
There are a few things to keep in mind when considering investing in real estate during periods of high inflation. First, be sure to factor in the increased cost of living when budgeting for your investment. Additionally, be aware that while property values may appreciate during periods of high inflation, they can also depreciate if the economy weakens.
If you’re still interested in investing in real estate despite these factors, there are a few ways to do so affordably. One option is to purchase a fixer-upper and renovate it yourself; not only will this save you money on labor costs, but you may also be able to sell the property for a profit down the line.
Another option is to invest in a rental property; not only will this provide you with a steady income stream, but you may also be able to increase rent prices as inflation rates rise. Investing in a rental property is the path of choosing fractional ownership or REITs.
Whatever route you decide to take, be sure to do your research and consult with a financial advisor before making any decisions.
Things to Consider Before Buying a Physical Real Estate Asset
If you’re thinking about investing in real estate, there are a few things you should keep in mind.
Location. The location of the property you’re considering is important for a number of reasons. Not only will it affect the value of the property, but it will also affect the rent you can charge and the costs of maintaining the property. When inflation is high, properties in prime locations tend to hold their value better than those in less desirable areas.
Type of Property. The type of property you’re considering is also important. Different types of properties appreciate at different rates during periods of high inflation. For example, luxury homes tend to do well during periods of high inflation, while more affordable properties may not appreciate as quickly. Accordingly, most types of commercial properties will see a growth in their value, since businesses will still need to operate, irrespective of the inflation scenario.
Rental Income. If you’re planning on generating income from your investment property, it’s important to consider how high inflation will impact rental rates.
Commercial properties can have lease terms as long as 10-15 years. At the cost of missing a spike in rental returns, you are rewarded with stable returns for the period. With residential ones, most rental agreements are a year long and it is easier to keep pace with inflation.
Look for properties that are undervalued. In a high inflation environment, prices can rise quickly, so it’s important to find properties that are currently undervalued. This can be tricky, but doing your research and working with a knowledgeable real estate agent can help you find good deals.
Consider investing in fixer-uppers. In a high inflation environment, it can be difficult to find properties that are both undervalued and in good condition. However, fixer-uppers can offer a good opportunity to invest in real estate amid high inflation. By fixing up the property yourself, you can add value and potentially sell at a profit later on.
Be prepared for higher interest rates. When inflation is high, interest rates usually follow suit. This means that if you’re planning on financing your real estate purchase with a mortgage, you should expect to pay higher interest rates. Again, doing your research and working with a knowledgeable lender can help a lot.
Closing costs. There are a few different factors to consider when it comes to investing in real estate during high inflation. One important factor is closing costs.
Closing costs are the fees charged by lenders, title companies, and other entities when you purchase a property. They can add up quickly, so it’s important to be aware of them when you’re budgeting for your purchase.
Timing Matters: When Should You Purchase a Property?
The answer, as with most things related to personal finance, is that it depends on your individual circumstances.
If you’re looking to purchase a property for investment purposes, timing is everything. You want to buy when prices are low and sell when they’re high. That’s easier said than done, of course, but there are certain periods when prices tend to be particularly low.
For example, right after a recession ends is often a good time to buy property. This is because demand is typically low while supply is high. This combination usually results in lower prices, which can offer a great opportunity for investors.
Of course, you also need to be aware of market conditions in your specific area. Just because there’s a national recession doesn’t mean that prices in your city will necessarily drop. In fact, they could even rise as people move to your city in search of better job prospects.
So, if you’re thinking about investing in real estate, pay close attention to market conditions both nationally and locally. Doing so will help you time your purchase correctly and potentially make a great return on your investment.
What if you already own property?
If you’re a property owner, the high inflation rate could be good news for you. As prices increase, the value of your property goes up as well. You may be able to sell your property for a higher price than you paid for it, or use it as collateral for a loan.
Of course, there are risks involved in holding onto property during periods of high inflation. If inflationary pressures lead to an economic downturn, the value of your property could drop. And if interest rates rise, your mortgage payments could become more expensive.
Still, if you’re thinking about investing in real estate, the current inflationary environment could present an opportunity to invest in a lucrative long-term asset. Just be sure to do your homework and consult with a financial advisor before making any decisions.
Sudarshan Lodha is the co-founder of Strata, a real estate investment platform. He has over a decade of experience in the private equity and venture capital space.
Aashika is the India Editor for Forbes Advisor. Her 15-year business and finance journalism stint has led her to report, write, edit and lead teams covering public investing, private investing and personal investing both in India and overseas. She has previously worked at CNBC-TV18, Thomson Reuters, The Economic Times and Entrepreneur.