Hedging Against Inflation With Attractive, High-yield Real Estate Investing

This year has brought spectacular returns for stock market investors

. Bonds and other types of fixed-income investments have also yielded solid returns. All this has boosted optimism about the government policies' ability to help the economy pick up, with expectations of an imminent bounce back in corporate earnings and thus a better stock market performance. However, a closer look into the economic forces suggests that it seems likely that the loose fiscal policy risks igniting high inflation that will compel some investors to allocate their capital into assets that serve as a hedge against the rising prices of goods and services. Gold and commodities - the "real" assets and proven inflation hedges - have already gained substantially so far this year. Yet, real estate, another inflation hedge, has seen large price declines. Therefore, this may be the right time to consider diversifying some of the investments into attractive real estate in order to take advantage of undervalued properties amidst historically low mortgage rates.

The recent rebound in the stock market and gains in fixed-income securities have come against an extended slump in both residential and commercial real estate markets. Home prices have declined so far on average by more than 30% from their peak in July 2006. Over the same period, the S&P500 is down by 14.4%. Some may assume that in the budding recovery, especially given the current bullish momentum, stocks represent a better buying opportunity. While this may hold true for certain equities, in general, the future market conditions, in case of inflation, suggest that other type of investments are likely to perform better.

If the rising speculations materialize that the federal deficit that is going to surpass 13% of GDP this fiscal year alone will boost inflation down the road, real estate could be considered a good hedge against inflation in the medium- to long-run. Real estate as the inflation hedge is truly a matter of the long-term mortgage debt with fixed interest rate. Fixed-rate mortgage payments remain unchanged while prices of goods and services rise and, eventually, interest rates, and thus variable-rate mortgage payments, move higher. At the same time, inflation puts pressure on rents. All property investors who rent their real estate can generate higher income streams, and therefore, higher yields on their property investment. Therefore, investing in real estate for passive income and enjoying the various tax write-offs could be a sound investment strategy to build wealth while paying off fixed-rate mortgage debt that is worth less each day so long as the inflation persists.

So, why is real estate attractive right now? It is so because home prices seem to be reaching a bottom, after several years of large declines in values. As noted earlier, housing values have fallen so far more than 30% from their peak. Indeed, there are some who believe that prices will decline from the current levels by another 10% of more. However, in many areas, the number of distressed properties for sale has climbed to records as a result of some 2.2 million homes in foreclosure last year and another 3 million expected to enter the process this year. This has created especially attractive deals in foreclosed and bank repossessed properties. Many banks are currently eager to dispose of these houses at major discounts in order to recover capital as quickly as possible. These properties, with beaten-down prices, could serve as an excellent opportunity to enter the real estate market and select those property investments that can provide both an inflation hedge and exceptional returns in the medium- to long-term periods.

All this suggests that opportunities exist for investors to capitalize on undervalued, quality real estate as part of their investment strategy that should strive to protect capital from losses in the wake of emerging inflation. Indeed, those with readily available finance and courage to invest in the current market can find good real estate deals that promise substantial returns over the medium and long-term investment horizon.

by: J.P. Turner

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