With rising borrowing costs and low supply, investing in real estate during inflation can be a challenge. Investing in real estate can be a great way to build wealth, but real estate can also be a great way to destroy wealth if too much leverage is used.

With the right investment strategy, you as a property owner can own an asset that will not only increase in value over time and provide a hedge against inflation but also generate rental income from tenants. Even with current high borrowing costs and a decline in the value of single-family homes, we believe real estate is still a prudent choice, although it probably is worth waiting for prices to correct further before you invest.

What is the short-term outlook for real estate?

In the near term, we predict modest price declines. Real estate is likely to be challenged due to significant increases in mortgage financing costs. Higher mortgage rates increase the total cost of monthly mortgage payments, leading to buyers requiring lower sales prices.

In the short term, we believe we are likely to see somewhat lower pricing in many areas around the country due to the increase in borrowing costs, along with some shifting toward higher-quality properties. We are already seeing declines in single-family home values in various markets around the country. Commercial real estate is also seeing pressure from higher interest rates, along with a bigger shift away from office work and brick-and-mortar retail.

On the other hand, multi-family residential real estate has been relatively strong, partly due to poor affordability and low inventory of single-family homes. Though we are seeing a slight decrease in vacancies, we believe vacancy rates are likely to increase, but we think the increases will be more gradual and vacancy rates will remain low overall. Industrial and logistics real estate should continue to outperform single-family and office real estate in the near term, due to superior investment fundamentals.

Ultimately, we still see a solid demand and relatively good pricing power (the ability to raise rents) in many segments of the real estate market. Once prices come down or interest rates decrease (or both), our short-term bullishness would return.

What is the long-term outlook of real estate?

Over the long term, we believe there are benefits of investing in real estate, especially multi-family residential and industrial/logistics properties, largely due to low supply and high replacement costs. Even though the cost of building new housing supply continues to rise as commodity prices increase, real estate has acted as a good store of value during inflationary periods historically, and we believe that should continue over the long term.

While we don’t foresee a crash in real estate, we still recommend using prudence, discipline, and caution when making a property purchase. When contemplating “should I invest in real estate now,” be sure to think about the amount of debt you are taking on before buying a property. The housing and financial crisis caused a lot of damage to individuals and businesses who took on more debt than they could afford, and they were wiped out when real estate prices declined.

What to know about investing in real estate

Although we believe real estate will ultimately prove to be a wise asset class to own in the long term, it is important to be discerning about the type of real estate in which you’re investing, the price, the financing costs, and the local fundamentals that could affect supply and demand. Pay special attention to valuations. If you’re investing in a managed real estate fund, make sure you’re investing with highly experienced managers who don’t rely too heavily on leverage.

Finally, stay diversified by limiting the percentage of your net worth that is invested in illiquid real estate investments and diversify using stocks, bonds, and other assets in your portfolio.

To learn more about investing in real estate, contact one of our financial experts today.

This article is prepared by Pekin Hardy Strauss, Inc. (“Pekin Hardy,” dba Pekin Hardy Strauss Wealth Management) for informational purposes only and is not intended as an offer or solicitation for business. The information and data in this article does not constitute legal, tax, accounting, investment, or other professional advice. The views expressed are those of the author(s) as of the date of publication of this article and are subject to change at any time due to changes in market or economic conditions. Pekin Hardy cannot assure that the strategies discussed herein will outperform any other investment strategy in the future.