Will Inflation Affect My Temecula Rental Home Investment?
Will inflation affect my Temecula rental home investment? Everyone and every industry has been impacted by Covid in some way, and our economy is still reeling after two years of shutdowns and uncertainty. Landlords, property management companies, real estate investors, and even average home buyers and sellers are wondering how the lingering impacts of the pandemic will affect them. One of the economic aspects everyone is keeping an eye on is inflation and wondering how it will impact rental home investments.
What Is Inflation?
Inflation is the increase of goods or services over a period of time. This can happen when the cost to produce certain goods and services increases. Or when there is a sudden and unexpected demand for a particular good or service. In our current economy, we’re seeing an increase in food, transportation, health services, oil and gas, and real estate, just to name a few. Covid also disrupted the supply chain for many goods and services and caused many businesses to be short-staffed. This, paired with the fact that people stopped spending money during the pandemic creates a recipe for higher prices for almost everything.
How Does Inflation Affect Temecula Real Estate?
Inflation typically hits financial, energy, and utility industries the hardest. The real estate industry can definitely feel the effects of it too. Inflation impacts the real estate market in many ways, including causing a rise in interest rates, higher mortgage rates, and higher rent prices. It also increases the cost of construction, which directly impacts those looking to build new homes.
One of the biggest ways real estate is affected during inflation is through rising interest rates. When interest rates are low, consumers borrow more money and spend more money. Lower interest rates make buying a home more affordable, which in turn increases the demand for property. If the supply remains the same and inflation causes the demand to rise, the natural result is a rise in house prices. In areas where land is limited, you see the effects of inflation on a larger scale.
Inflation also directly impacts the construction industry. Rising costs for labor, materials, and machinery make it more challenging for construction companies to build new homes and help with the supply problem. It takes longer for construction companies to build new houses. When they do, the home prices are significantly higher to make up for their increased expenses.
When you add land-use restrictions to the mix, you’ve got a recipe for decreased supply. All during a time when demand is high.
Should I sell my Temecula rental property to combat inflation?
For those thinking about selling their homes, a tight and inflated market could be a good time to do it. Your home may be worth significantly more than you bought it for. You could easily profit from a home sale. However, the next question would be could you afford to buy a home in the same area with the increased home prices? Or has inflation negatively impacted your spending power? Is it better from a tax perspective to reap the benefit of consistent rent increases?
Experts agree that historically speaking, real estate is a safe haven during inflation. While mortgage rates, interest rates, and home prices tend to follow inflation, rent
What does inflation mean for Temecula rental properties?
Historically, real estate has been viewed as a hedge against inflation. It is commonly referred to as a “safe haven investment” during times of inflation. Usually, home values follow inflation cycles. Going up when inflation is higher and coming back down when the economy balances out. One of the most common questions for those looking to buy property during inflation is how the cost of homeownership compares to local rental rates. How will this affect your Temecula rental property investment?
According to a report from Freddie Mac, “Annual rent growth is forecasted to be 3.6% in 2022, with rising rent expected in every major U.S. housing market.” While this could make it harder for first-time renters to afford rent in bigger cities, it also means investors can raise their rents as inflation rises. Rental rates can fluctuate to match the rising costs of goods and services in the local economy. This is good news for investors across the country. Ensuring they continue to earn a profit from their properties even when prices are rising around them.
Next steps to help your Temecula rental property investment thrive through inflationary periods
If you own an investment property in the Temecula or Murrieta areas and have questions about how the local economy will impact your investments, schedule a chat with us today. We can discuss how using a professional property management company can improve your bottom line, even during periods of inflation.