Ocala real estate is about to benefit from economic growth never before imagined in North Central Florida. Thanks go to the projected more than tripling of the contribution the equestrian industry makes to our community.
The annual inflation rate in the United States is higher than we would like. But actions taken by the Fed and the Biden Administration are having an impact. Whether you agree with President Biden’s recent visit to Saudi Arabia or not, one thing is clear. Since then, with the Saudis’ help, the price of gas has plummeted. Of course, the cost of fuel impacts the cost of transporting goods to market, and to the cost of the goods themselves as a result.
Additionally, the increases in the prime rate initiated by the Fed have had the desired impact, as reported by Chairman Powell recently. Therefore, the FED has signaled that future rate increases will not be as frequent or as aggressive as predicted. Since the anticipated more aggressive monetary policy was already built into interest rates, the Fed’s announcement has caused mortgage rates to move downward significantly. All of this is excellent news for the real estate market. However, even if it turns out that we have dodged the proverbial bullet this time, inflation concerns will always be with us.
How do we insure our financial resources against the risks posed by inflation? A sound hedging strategy is an alternative wise investors should consider seriously!
The Impact Of Inflation On Ocala Real Estate
Inflation is defined as a rise in the costs of goods and services, which in turn decreases the purchase power of the dollar. As prices of goods and services rise, the higher cost of purchasing necessities reduces funds available for discretionary spending. As a result, many businesses suffer, tax revenues fall and the economy spirals downward. Often a recession then ensues.
In an effort to curb inflation, the Federal Reserve usually raises the federal funds rate and employs other monetary policy tools. As a result, consumers pay more for credit.3 When the costs of large purchases such as homes, vehicles, furniture and major appliances rise, fewer people are able to afford them. Many are then forced to postpone such purchases and their actions negatively impact the economy.
Ocala Real Estate: A Hedge Against Lower Inflationary Standard of Living
In inflationary times, wage growth tends to lag behind price increases. According to Moody Analytics, when adjusted for inflation, average weekly earnings in January 2022 were down 3.1% from a year earlier.4 As a result, the cost of living became less affordable for wage earners. Inflation also impacted those on a fixed income, retirees for example, and caused many to make lifestyle changes to prioritize spending money on essentials.
As inflation reduces the purchasing power of the dollar, savers see the purchasing power of their bank accounts decline. Therefore, many are forced to withdraw their savings at a quickening pace. Of course, while inflation usually triggers an increase in the interest paid on savings, such increases rarely offset the decrease in purchasing power it causes. As of February 2022, the national average interest rate for a savings account was up 0.06%, not nearly enough to keep up with inflation. Unfortunately, economists did not expect that rate of return on savings accounts to climb much higher.3 Of course, such circumstances dictate that savings be migrated from bank accounts to investments that provided a better hedge against inflation.
REAL ESTATE: A PROVEN HEDGE AGAINST INFLATION
Let’s examine which investment vehicles perform best in inflationary times:
Some people invest in stocks as their primary inflation hedge. However, the stock market can become volatile during inflationary times, as we’ve seen in recent months.5 To be sure, the risk associated with this volatility can make investment in stocks too risky to be a viable inflation hedge.
Commodities, such as oil, livestock, and minerals for example, are highly volatile investments in the best of times. However, many believe that the prices of commodities climb in inflationary times. While this may be true, volatility makes their movements difficult to predict. For example, a classic commodity investment, gold, hasn’t risen consistently during periods of inflation since the 1970s according to reporting by Morningstar Direct.6
Inflation protected Treasury securities, or TIPS, are U.S. government-issued bonds that are indexed to the rate of inflation. However, while some may see safety in such bonds, that safety comes at a price. The exceptionally low interest rates these bonds carry create too large a sacrifice to make them a viable hedge against inflation in our view.7
How does real estate perform in time of inflation? Historically, prices across the board tend to rise during inflationary times and often rise faster than the rate of inflation.8 This trend is one of the factors that have accelerated demand for real estate over the last couple of years.9 Of course, investing in real estate is a long term proposition. Therefore, you would be looking at this alternative too simplistically if you relied on this trend alone.
What you should consider is that over the long term Ocala real estate values have outperformed other assets and real estate prices have risen faster than the cost of living. Additionally, when you invest in real estate, mortgage loans provide leverage, a factor which raises returns exponentially. When you consider the performance of real estate prices over the long term, the benefit derived from leverage, and the relative safety of real estate as an investment vehicle, you would be wise to conclude that real estate is the ideal hedge against inflation!
TYPES OF REAL ESTATE INVESTMENTS
Though there are myriad ways to invest in Ocala real estate, three stand out as vehicles that most effectively combine safety, growth and the ability to survive inflationary times.
Your Primary Residence
You could not make a safer, more intelligent decision than to own your primary residence, no matter the state of the economy. However, in inflationary times the advantages of homeownership become even more apparent. As inflation raises prices throughout the economy, the value of your home is rarely left behind. But more importantly, if you have wisely opted for a fixed interest loan, your mortgage payment is fixed. Therefore, while rents often surge during inflationary times, you have guaranteed that your housing costs will fluctuate very little. What better way to protect yourself and your family from the transitory impact of inflation?
Traditional Long-Term Rentals
Long-term residential rentals offer many advantages. Since for the vast majority of long term renters the property serves as their primary residence, they are unlikely to abandon it in difficult times. This makes investing in such properties safer and more stable. Additionally, most expenses associated with long term rentals, like mortgage payments, real estate taxes and insurance costs, do not fluctuate with inflation. However, rents often do fluctuate upward. Therefore, even though some expenses rise with inflation, the rise in rents usually more than offsets these increases. As a result, you should have no difficulty sustaining your ownership during such difficult times, and if you invested wisely, your positive cash flow should actually make living in periods of inflation less stressful.
Short-term or vacation rentals function more like hotels in that they offer temporary accommodations. A short-term rental is defined as a residential dwelling that is rented for 30 days or less. The furniture and other amenities are provided by the property owner, and today many short-term rentals are listed on websites like Airbnb and Vrbo. You will pay a price for taking advantage of the services these sites offer. However, these costs are likely to be far more than offset by the reduction in revenues lost to vacancies.
A short-term rental can potentially earn you a higher return than a long-term rental, but this comes at the cost of daily, hands-on management. When you invest in a short-term rental, you’re not just in the real estate business. You are also in the hospitality business. However, if you plan and invest wisely, your short-term rental can serve both as a hedge against inflation and as an amazing source of income. As a bonus, when it is not occupied, it can also serve as an enticing vacation spot for yourself and your family!
WE’RE INVESTED IN HELPING YOU
Inflation is a fact of life throughout the world. Luckily, you can mitigate its effects by including Ocala real estate in a carefully designed investment portfolio. Owning a primary residence is undoubtedly the best place to begin. However, you would be wise to carefully consider other forms of real estate investments as well.
If you’re ready to build wealth with real estate, while taking advantage of leverage and employing your investment as a hedge against inflation, contact us. Our team is at your service.
“Real estate is an imperishable asset, ever-increasing in value. It is the most solid security that human ingenuity has devised. It is the basis of all security and about the only indestructible security.” – Russell Sage
Investment in Ocala real estate is an opportunity to build wealth rarely encountered. Imagine a community of 65,000 people which has in its midst an industry that generates $3 billion annually in gross revenue. Now imagine a projected growth over a few years that will more than triple the revenue this industry generates for the town. This additional $7 billion in revenue is bound to launch an expansion of infrastructure, job creation, tourist revenue and much more. Of course such growth cannot help but bring with it a demand for real estate never imagined before in North Central Florida. This brings to mind Mark Twain’s sage advice, “Invest in land. They are not making any more of it!.”
Andrew Kruglanski, MBA, ABD, Broker