How to make money from inflation?
My approach to profiting from a period of high inflation
- Unless you have been living under a rock recently you have heard inflation is on the rise, and as predicted by the Federal Reserve is only going to increase. As an investor in the stock market, you need to be aware of it, especially if you have individual stocks investments or worse cash just sitting in a bank account!
- One of the best inflation hedges there is, and an area I have been consistently investing in lately is leveraged real estate. Meaning the debt component is fixed, while the actual underlying asset (i.e. the property) value and rental income keeps rising with inflation.
- I have included a summary of the key inflation-protected REIT that I am personally investing in. I expect this REIT to accelerate in value over the coming years, with inflation only adding to that acceleration.
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Who says inflation is a bad thing?
If you understand the effects inflation has on certain investment assets (e.g., stocks, property, commodities etc.) you can actually profit from it.
Everybody out there seems to be worrying about inflation right now, the crazy tabloid headlines are definitely the source of this worry. And true it can have a very real impact on your earnings and what you can actually buy with the money in your pocket. Whether it be food, gas, home furniture you name it – inflation impacts everything.
The Federal Reserve’s policy of putting their money printing machine into overdrive more than any other time in human history has been one of the key drivers of inflation.
We have already seen the impact from the rising price of commodities such as lumber and copper, along with utility prices such as natural gas. These have actually doubled over the last year and in some cases increased far higher.
Similarly in other asset classes such as property, home prices in the US are up on average over 15%, and monthly rents have increased the most they have in the last 15 years.
In fact in America home prices increased by 11% in the year to January, their fastest pace in 15 years. Inflation is one of the key drivers in this increase.
So you might then determine if, as predicted, inflation continues these increases will follow a similar trend.
And you would be right, property prices are predicted to continue to increase across the US, along with property rents driven by soaring inflation. Particularly in heartland America such as Texas.
Along with the major migration of folks into these locations, que moves from the likes of Tesla and Toyota – driving up prices and rents further.
So how can you profit from the FED’s prediction and actually make money from increased inflation?
Well you could follow the historical route of investing in metals such as Gold or Silver which are seen as a store of value. But who wants to store a whole pile of gold in their backyard? (okay, slight over exaggeration but hopefully you get my point)
This is why I am personally investing in leveraged real estate.
My favourite inflation hedge remains leveraged real estate.
Meaning companies or investment trusts that borrow money to buy properties. This at its most basic level is what Real Estate Investment Trusts (REIT’s) actually are. They borrow money and buy property primarily for the rental income they generate. The debt portion they borrow becomes cheaper as inflation rises, while the price of the property itself along with the rental income will increase in line with inflation.
REITs are also required to distribute a minimum of 90% of their taxable income to shareholders. After all, this is why REITs typically offer a higher dividend yield than the average S&P 500 stock.
Therefore if like me, (and the FED) you think inflation will continue its current trend – investing in leveraged real estate is a sure fire way to actually profit if this scenario plays out.
No longer will you be running scared from the news headlines. You instead will be standing tempting inflation forward with a tub of Ben and Jerry’s shouting ‘SHOW ME THE MONEY’… I digress.
So how am I getting in on the action – and how can you to?
Well I am investing in the following individual REIT which is widely available through your brokerage account.
*As always, I am not an expert or financial advisor, so nothing on this website should be considered financial advice. These are just my opinions, everyone is different. Always do your own research and have your own independent thought process.
BSR Real Estate Investment Trust (HOM.U:CA)
BSR is a leading owner and operator of multifamily communities in the Sunbelt region of the United States, the like of Texas, Arkansas. and Oklahoma. Headquartered in the historic Union Station in downtown Little Rock Arkansas. BSR traces its roots back to 1956 with the formation of Bailey Corporation. BSR’s core markets include Metropolitan Statistical Areas with some of the lowest unemployment rates in the United States, including Austin, Dallas, Houston, Oklahoma City and Northwest, Arkansas.
When I was seeking out an inflation hedge 12 months ago, I researched the transition of American millennials to the Texas region. The likes of Austin and Dallas which are exploding in rental and home prices increases.
Take for example Dallas – home prices have risen sharply over the last 12 months from $316,000 in May 2020 to $420,000 in May 2021. That’s a 33% increase in just 12 months! Similar trends are playing out across Texas from Houston to Irving.
These areas are exactly the places that BSR has and is continuing to invest in. Let’s take a look at their property portfolio breakdown from their most recent earnings release.
The bulk of their investments are across three bordering U.S. sunbelt states which are following this trend. Principally Texas, Oklahoma and Arkansas. In fact the vast majority of its revenue comes from the Texas Triangle (~80%).
See below a breakdown of property locations and along with some highlights of their individual properties.
The trend I mentioned earlier of millennials and companies in general exiting the likes of LA, and New York for lowest cost of living and lower tax locations is picking up pace and is predicted to continue.
Look at the famous podcast host Joe Rogan who recently moved or Elon Musk who announced he is leaving Silicon Valley for Texas, and predicts the tech hotspot could lose its influence.
Tesla will build a new factory in Austin and Space X – Mr Musk’s spaceflight company – already has facilities in Texas.
“The two biggest things that I got going on right now are the Starship development in South Texas … and then the big new US factory for Tesla,” Mr Musk told the Wall Street Journal.
This increase in habitants along with projected population growth across all of their locations is pushing housing costs and rents only higher. Although this is tough to see on renters, it is a money making machine for the likes of BSR. And can be very profitable for a savvy investor – I’m referring to you ;).
To further amplify, the massive surge in commodities over the last 18 months such as construction materials and lumber is making building new homes less profitable for home builders out there. This is resulting in far fewer new housing projects – this will only increase the demand for rental units that BSR already owns across these locations. Therefore through increase in rents, BSR earnings will only go one way – which is up!
I have been investing over the last few months heavily here. In fact the REIT is still at a reasonable price having only recently reached pre-pandemic levels – while at the same time paying a healthy dividend of approx. 4%.
See below the price history over the last 5 years.
Other REIT’s to consider
There are many other examples out there or similar REIT’s so I would encourage you to do your own research. Another example is Medical Properties Trust (MPW) who are also investing heavily in this region.
Or, if you are completely risk averse you could buy a REIT ETF such as Vanguards (VNQ) and never have to worry about checking in on the latest earning report of your REIT investments. Because you are instantly diversified across 174 stocks issued by real estate investment trusts (REITs) across a variety of real estate assets such as office buildings, hotels, and other real property.
But I prefer to put my money in REITs in locations where I see the biggest growth.
Residential property in heartland America and the Texas triangle is where I see the highest growth potential – only aided by our friend inflation.
The Key Point
Inflation is a big concern, you should never just leave your money sitting in an individual bank account losing money every year. Cash is trash.
Owning leveraged real estate is one of the best ways to actually profit of inflation and BSR REIT is my pick of where I see the biggest potential over the next 5-10 years.
Let me know in the comments what other REIT’s you see potential in or alternative investments you are considering to protect against inflation?
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I am, and will continue to practice what I preach!
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Catch you soon,