“PUFF the magic draaaagon lived by the seaaaa”
Ok so hopefully you sang that first line by impulse and now your mood is heightened so your eyes won’t glaze over as you read this
Because that’s inevitably what happens to most people when you mention… inflation.
WAIT, hang with me here… I can see the glaze happening! Let me tell you why it’s not some foo foo imaginary dragon-esque concept, what it has to do with multifamily and why you should care. I’ll make it as quick and painless and possible, promise.
We all know what inflation is, on the simplest level, it’s when things cost more today than they did yesterday.
But what does that mean? It means, the $ is losing its power….
Imagine Dollar 1 is at work stacking boxes. The employer keeps getting more boxes to stack, so more workers are needed. In order to create another worker, a piece of Dollar 1 has to be torn off and used to “clone” worker Dollar 2. Now there are two workers, but Dollar 1 is weaker because we tore him and Dollar 2 was created off of the weaker torn Dollar 1…. so now they are both weaker versions of the original.
You can keep creating more dollars forever, but each generation will be weaker than the previous. And what ends up happening is you now need more dollars to do to the same job as fewer dollars could have done before.
What does this have to do with multifamily?
If you have ever rented an apartment, you know traditionally, the rent goes up every year.
Why? Did your apartment get bigger? Did it magically displace itself into a better neighborhood?
Nope… each year the dollars just kept getting smaller and weaker so more are required to “fill up” the same size apartment so the rent can be satisfied.
Behind the scenes, the expenses to operate the building are also increasing because of inflation… inflation plays no favorites, everybody pays it. BUT, in rentals, it gets passed on to the residents.
Guess what else? As the rents increase because of inflation, so does the value of the building (commercial buildings are valued by the income) and so does your net worth as an owner.
Why you should care
As a tenant – there’s nothing to like about it. As an investor in a multifamily deal – you’ve just hedged your dollars
What?? You mean bushes? No silly rabbit…
From investopedia: An inflation hedge is an investment that is considered to protect the decreased purchasing power of a currency that results from the loss of its value due to rising prices either macro-economically or due to inflation.
As rents increase because of inflation, so does your percentage of the cash flow
So does the value of the building (commercial buildings are valued by the income)
Consequently does your net worth as an owner.
By smartly preparing for your future and by putting your ‘today dollars’ to work in a multifamily building, they will retain the same power for you tomorrow. The HEDGE is protecting your workers’ value and strength.
…Maybe that wasn’t so quick, but hopefully it was painless!
Until next week… invest wisely!