How To Beat Inflation With A Buy-To-Let Portfolio
Due to the economic strains that have been introduced by the Coronavirus pandemic and conflict around the world, the UK has experienced a period of fluctuating inflation which has many investors worried. Inflation is the phenomena where a currency’s buying power decreases over time, which then leads to goods and services increasing in price. If you’ve ever had a grandparent talk about how they’d go down to school with £5 in their pocket and return with a whole turkey, a six pack of coca cola, and a new house you’ll understand what I mean. £100 in today’s economy simply does not have the same buying power that it did ten years ago. Ideally, inflation will rise at a steady rate along with wages so that people can continue to afford their lifestyles and the economy can continue to grow. However, in times of high inflation, like we saw last year where inflation hit a 2-year record of 2.1%, that’s when people start to get concerned. This is particularly problematic for investors who would like to get the greatest return for their investments ahead of inflation. If an investor regularly receives £1000 Return on Investment (ROI) every year, when inflation rises, this means that his ROI has actually decreased even though the monetary value is the same just because his buying power is lower. In worst case scenarios, this can even mean that an investor might start to make losses on their investment.
One way that savvy investors mitigate this risk is by investing into asset classes that offer higher returns over inflation. One such asset class, is real estate, particularly Buy-to-Let real estate. There are many reasons why BTL real estate is particularly popular with inflation concerned investors, and here’s some of them:
House Value Appreciates Over Inflation:
In the UK market, property tends to appreciate in value at a rate of around 3-5% each year, this is higher than the average inflation rate of 1-2%. This means, that though a sudden increase in inflations might be concerning, it likely won’t have a disastrous effect on your income as you’ve effectively beaten the corrosive effect of inflation since your house’s value is appreciating around 2% higher than inflation.
Whether or not your property will fall on the higher end of the appreciation scale is dependent on factors like locations, and facilities. This is why it’s so important to consult a realtor and a financial advisor before investing property to make sure that it can perform the way you want to!
If you’re investing in BTL you’ll likely be using the rent you accrue to both pay off your mortgage and any issues that come with the property as well as to increase your own personal income. Especially if you use short-term leases, like in student properties, you’re able to gradually drive up your rent between tenants in accordance with the rise of inflation.
Ezytrack’s analysis of rental prices in the UK confirms that rent has increased by 2.3% against an inflation rate of 2.1%. This is even higher in densely populated, cosmopolitan areas like London where rent in fact rose by a rate of 3.1%.
It’s true that certain expenses that come with the running of a rental property, such as property management and maintenances might rise in accordance with inflation. This is still mitigated by your ability to raise rent so that you can continue to afford all your expenses while protecting your ROI.
Mortgages Depreciate in Value Over Time:
Most mortgages have a fixed rate payment, meaning that the amount you pay toward your mortgage stays the same each month and is unaffected by fluctuations in the economy. This is especially useful for property investors because, if their mortgage payments are £500 a month, after a few years, that £500 is going to be worth significantly less and their rental income is likely to have significantly increased in that time. That means that their base rental income will not only have increased, but the actual worth of what they’re retaining will have as well.
This is not to say that there aren’t concerns with investing in BTL property at the moment. It is now more expensive than ever to get one’s foot on the property ladder with four in five landlords saying they were “concerned or very concerned” with the effect that inflation was going to have on their ability to invest in property in the future. As maintenance costs and other expenses that come with maintaining a rental property are forecasted to rise, the disposable income that a landlord might have to then invest in other properties. This is on top of rising house prices which makes it difficult for first time investors to even get in the door. This is why, BTL property is best when used as a diversification of an existing investment portfolio rather than as a single stream of income. This is true for all types of investment, as any certified financial assistant will attest. If you maximise your stream of incomes you will be better protected from the danger of things like a rise in inflation affecting your ROI.
Even with some landlords being concerned about the way inflation will affect their ability to invest in property in the future, this does not mean that they’re looking to get out of the housing market. On the contrary, less than 30% of landlords say they’re looking to reduce their property investment activity while inflation is high, and of the people who won’t reduce, a third of them say that they will continue to invest in the property market and a further quarter say they will increase their property investments. This is testament to the faith that these people have in the continued stability of the UK housing market and the potential to continue to provide a good ROI. This is based on centuries of being the most stable housing market in the world
This shows that there are some really great profits to be made by investing in BTL property. From depreciating mortgage rates, appreciating property values, and the ability to shift the rent to match market fluctuations all make real estate investment a safe haven from the dangers of inflation. And while there are concerns about how rising inflation can affect people’s ability to invest in the property market, there is still a great deal of confidence in its continued stability and potential to generate profits. This makes it an ideal asset class to work in tandem with other investments that might be more at risk but offer a higher return on investment.
In summary, property is possibly the only stable / low-risk investment which can act as a hedge against economic inflation or depreciation of money value. While there are other investments like high growth companies or public market stocks, they are far more volatile than property prices which is usually unsuitable to many investors. In property, investors are likely to achieve their goals 9 out of 10 times, which is not the same in the stock market where less than 1 in 3 stocks outperform inflation. This means finding that one stock may not be everyone’s cuppa.