Inflation – can’t stand it, but can’t get away from it. As prices rise, the value of money diminishes, meaning that you would either need to scale down, or employ strategies to combat inflation. Historically, the average annual inflation rate in the United States has been around 3%. This may rise in the future, which calls for a stronger need to invest smartly to safeguard your wealth portfolio. At Fusion CPA, we have years of experience in this area. Our CPAs have helped individuals and businesses of all sizes develop future-proof finance strategies. In this article, we explore how investing in rental properties can serve as a hedge against inflation.
Understanding inflation
Inflation threatens the wealth of individuals and businesses alike. It affects both purchasing power and investments alike. As the price of goods and services increases over time, assets such as stocks, bonds, and savings accounts may struggle to keep up with inflation. This would mean a gradual decrease in the value of your investment returns if they grow at a lower rate than inflation.
There are ways to mitigate the impact inflation has on your wealth and financial stability. One such strategy involves investing in rental properties.
Inflation-hedging qualities of rental properties
Rental properties have a unique makeup in that they serve as a timeless service that can withstand inflation. Unlike cash or fixed-income investments, rental real estate typically appreciates in value over time. This means that as inflation drives up living costs, rental income keeps the pace in terms of inflation which can benefit your retirement strategy.
Appreciation of real estate
In addition to being able to weather the storm of inflation, real estate also typically appreciates over time. This is because property values often rise in tandem with inflation. Thus, holding onto property through periods of inflation will likely increase the value of your wealth portfolio, and ultimately solidify your financial security.
Mortgage financing and inflation
It may not be apparent, but mortgage loans can amplify the benefits of owning rental properties, especially during inflationary periods. By using borrowed funds you can make even more money, especially when prices are going up. This helps you grow your wealth steadily over time. Furthermore, opting for a fixed-rate mortgage can hold even more benefits when it comes to inflation. This is because you would be locking in borrowing costs, and essentially repay the loan with money that is worth less due to inflation. Essentially reducing the real cost of debt over time to help you maximize your returns.
Diversifying your real-estate portfolio to mitigate risk
Rental properties also serve you in terms of diversifying your investment portfolio and reducing overall risk. Unlike other investments that may be susceptible to market volatility, real estate is a tangible asset with intrinsic value. Thus, including rental properties in your investment portfolio can minimize the impact of adverse market conditions on your overall wealth.
Moreover, rental real estate tends to exhibit stability and income potential, even in uncertain economic times. This stems from the essential need for housing, which persists regardless of economic conditions. As a result, rental properties provide you with a consistent stream of income, offering a buffer against economic downturns.
Tax benefits of rental properties
From various deductions to depreciation allowances, rental properties also offer tax advantages that can significantly boost your bottom line.
- Deductions such as mortgage interest, property taxes, insurance, maintenance expenses, and management fees can reduce your taxable rental income.
- Depreciation allows you to exclude a portion of your property’s value as the building wears down over time. This can offset rental income, to further reduce taxable income.
- Preferential capital gains treatment can come into play when selling your property. In this case, you may qualify to pay lower tax rates on profits realized from the sale.
It is important to liaise with your CPA to consider your eligibility for these tax benefits. Not only provides immediate cost savings, but also contributes to the long-term wealth-building potential of your portfolio.
Risks and considerations
While rental properties offer numerous benefits, it does not come without risks and challenges. One of the primary concerns is property management. This can be time-consuming and demanding. From finding reliable tenants to handling maintenance requests and addressing legal issues, managing rental properties requires considered expertise. Moreover, rental properties are not immune to market fluctuations. Economic downturns, changes in local market conditions, and shifts in tenant demand can impact rental property performance. Your property may be vacant for an extended period while recruiting new tenants. This needs to be factored into your financial strategy as it can impact cash flow and overall returns.
To mitigate these risks and make informed investment decisions, you can benefit from consulting with a qualified real estate CPA. At Fusion, we help you tos afely expand your portfolio. Our CPAs research market trends and assess your financial position to ensure long-term success. In addition to this, Fusion CPA can help you maintain accurate and compliant records for tax purposes. We submit tax returns on behalf of our clients and can assist with audits. Contact us today!
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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.
