Property Management Blog

What to do about Inflation?

Ironclad Property Management - Friday, May 20, 2022

Back in 2010 when the housing crash was occurring, I started buying houses because I thought inflation was around the corner with the easy money, Quantitative Easing policies of the federal government, and I was going to become rich. I had heard of Weimar style hyperinflation where only hard assets were worth anything and there are the pictures of people using a wheelbarrow full of cash to buy a loaf of bread. 

Now in 2022 with inflation the highest I have ever experienced; I am starting to question my giddiness from 2010 of the thought of high inflation.

Inflation hurts. Food costs more. Oil and gas costs more. Materials cost more. Labor to work those materials cost more. Everything costs more and with rent prices going up, it is not making it any cheaper for tenants.

With real estate prices going up over the past year, I’ve been thinking of what is about to happen for the C class tenants. I know that I have experienced a surge of evictions and a surge of delinquency from the tenants in my portfolio. So many of them live paycheck to paycheck. So many of them got used to receiving more money from the stimulus and enhanced unemployment benefits. So many owners, especially ones that just bought, are about to feel some real pain with this and with the maintenance costs going up. If people are not well capitalized for higher vacancy, bad debt, capex and maintenance, they are going to be losing money and may not survive. I could see housing prices going down in the future because of this.

With all of that said, I still think real estate is where to put your money long term. If the price to build a house is going up and the vacant land prices are going up, how is it possible (over the long term) for housing prices to go down. Rents have to keep pushing up to encourage building to occur. This is the good part of inflation; over time your cheap financed debt will stay cheap, and the rents will go up to more than cover your debt service, giving you a greater dollar denominated return. 

The point of all of this is to buy what you are happy holding for a long period of time. These areas generally have better tenants where you can pass along rent increases to and they have enough income to cover discretionary expenses.  Keep sufficient reserves to cover turnover and other unexpected costs. If you do those things, you can be successful in this market like any other, even with high inflation.