“If you don’t find a way to make money while you sleep, you will work until you die” – Warren Buffett

The Implications Of Inflation

The June inflation numbers are in, and they’re worse than expected.

Inflation surged 9.1% in June, accelerating more than expected to a 40-year high. Economists expected the consumer price index to climb 8.8% in June. The last time inflation was this high was in the 1980s and it took two recessions to finally get it under control. The implication is that the road ahead could get very rocky, with many pundits talking about recession as if it were already here.

“The first rule of an investment is don’t lose money. And the second rule of an investment is don’t forget the first rule.” -Warren Buffett.

Following Warren Buffett’s advice, one would think that the simplest way to avoid losing money is to put it under the mattress. But, that wouldn’t be wise as you would lose money due to the diminishing buying power brought on by inflation.

Let me illustrate: If you put $100,000 under the mattress with the intent to buy a $100,000 automobile in a year, because of inflation, that same automobile will cost $109,100 in a year when you go to pull those large bills out from under the mattress to pay for the car. Hiding your money lost you 9.1% in that one year.  

So hiding money is not a good idea. But what about common investments? How do they stack up against inflation?  

Here’s a summary:

  • Stocks. Stocks have historically moved in the opposite direction of inflation. This is due to the Fed’s approach to corralling inflation and increasing interest rates to slow business and consumer spending. Decreased spending hits corporate bottom lines, which lower stock prices. This year, as the Fed has increased interest rates three times, the Dow has shed more than 14% in the same timeframe.
  • Crypto, Blockchain, and NFTs. The whole blockchain metaverse of investments, including crypto, NFTs, metaverse real estate, and such, have not fared well during this year of record inflation. Since those assets have no utility, generate no income, and are based on the “greater fool theory,” as Bill Gates has criticized`, investors have been liquidating them in droves to meet their spending needs. For example, Bitcoin is down more than 56% year-to-date as of this writing.
  • Certificate of Deposits (CDs). According to Nerdwallet, the best rate listed right now on a CD with a fixed 5-year term is 3.35%. Considering inflation, that’s an annual loss of -5.75%.
  • Money Market Accounts (MMA’s). The best rate listed by Nerdwallet for MMA’s is 1.10%. That’s an annual loss of -8.0% when considering inflation.
  • High-Yield Savings Accounts (HYSA’s). The best rate listed by Nerdwallet for HYSA’s is 1.52%. That’s an annual loss of -7.58% when considering inflation.
  • Annuities. Some of the best fixed-income annuity rates right now hover in the 4.5% range, but that doesn’t take into account administration fees of 1-3% annually, putting real rates at 1.5% to 3.5%. In the best-case scenario, the annual loss of the best annuity is -5.6% when considering inflation.
  • Treasuries. The current 10-year treasury rate sits at 2.96%. Considering inflation, that’s an annual loss of -6.41%.

The Investing Landscape

A survey of the investing landscape does not paint a pretty picture for investors. Traditional investments and new “cutting edge” investments are not doing well in the face of inflation, but that doesn’t mean all investments are underperforming. Not all investors are hiding or parking their cash in money-losing assets. One class of investors is actively shopping for opportunities.

The ultra-wealthy are prepared for any economic environment, and inflation doesn’t stop them from shopping. But, what are they shopping for?

Surprisingly, they’re not shopping for anything different than what they usually shop for. They’re just looking for bargains in this environment, as evidenced by the record amount of dry powder (cash on hand for acquisitions) reported recently by investors anticipating a downturn and looking to pick up bargains. But, what kind of assets are they pursuing?

The ultra-wealthy are pursuing assets that will bulletproof their portfolio from the twin terrors of inflation and recession. What are they allocating to?

Cash flowing tangible assets tied to essential goods and services – non-luxury items that consumers will always need like shelter. That’s why certain classes of commercial real estate (CRE) like affordable housing that thrive in downturns are a big draw for these investors.  

Case in point: While single-family housing values plummeted during the Great Recession, the affordable housing sector thrived, including affordable multi-family apartment buildings, mobile home communities and self storage facilities.

Apartment Buildings demonstrated their resiliency again during the pandemic-induced downturn, where they saw occupancies and rents increase compared to other asset classes. While some CRE sectors are cyclical, with some sectors like retail and office more correlated to the broader economy, Apartments have proven to be less correlated and thrive during downturns.  

Essential assets like Apartments have proven that operators can increase rents consistent with inflation without any reductions in occupancy. If there’s one asset built to bulletproof your portfolio from inflation, this is it.

How To Invest In Real Estate With Self-Directed Retirement Funds

Check out this educational webinar that I co-hosted with my business partners if you’d like to learn more about investing in real estate and other alternative assets with your retirement account.

Renters are staying in their apartments longer, paying more

The disparity in the price increases between renewals and new leases isn’t an accident. Many apartment operators try to thread the needle between introducing higher rates to existing residents while trying to keep them in their apartments.

“With our current customers, we are really cognizant of what we’re doing there. We’re not pushing renewal rates 13% to 18% like we’re seeing with new lease rents,” said Samantha McQuown, vice president of business operations for King of Prussia, Pennsylvania-based Morgan Properties, the No. 3 largest owner of apartments in the country, according to the National Multifamily Housing Council. “That’s definitely something that we take into consideration. It is so important to keep our customers happy. It’s important to keep our customers in place.”

It’s more than just customer service driving the disparity in renewal rates. When a resident moves out, a unit sits empty and isn’t earning income. Then maintenance comes in and makes routine checks and repairs as part of what apartment managers call the “turn process.” If the residents stay longer, maintenance isn’t as needed.

“It might become even more prevalent where people want renewals because labor is so tight,” said Andy Newell, CFO for Monarch Investment and Management Group, the No. 20 manager in the country. “The more we lean on maintenance people, the more there is a premium on just renewing the lease.”

Renewal rent growth

Generally, renters, at least at the upper end of the market, seem to be absorbing these increases, according to Parsons.

“There are a few cases where you had people who got really good deals last year, particularly in the big cities like New York and San Francisco,” Parsons said. “Then their renewal comes up and it’s closer to market. Concessions burned off and they are going to be a little more challenged. I don’t think that is a massive trend, but I think you’re seeing some of that.”

Residents of large coastal cities have seen rents skyrocket to record levels. Tenants paid a median of $3,870 on new leases signed in New York City in April, according to Bloomberg. The weighted average asking rent for an apartment in San Francisco clocked in at $3,500 last month, still $600 lower than prior to the COVID-19 pandemic, according to local real estate media outlet SocketSite.

However, renewal rates aren’t increasing at the same level across the board. In more expensive class A and class B apartments, they’re rising 11% to 12%, according to RealPage. In class C apartments, they’re increasing by 7.1%.

“Renewal [rents] in class C are growing below the rate of inflation right now,” Jay Parsons, vice president and deputy chief economist for RealPage, told Multifamily Dive. “So, it’s a much better deal to renew in a C than [to] rent something else.”


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506(C) Investment Opportunity

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