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Inflation is a phenomenon of which no one is exempt. All people in all countries are exposed to its effects, which under certain conditions can be devastating. Why? Because by nature, inflation is the increase in the price of goods and services in a country, which is measured using certain indices.
Inflation’s inevitable because it can occur in certain ways: by the law of supply and demand – the more demand a product has, the more its price increases; by costs – if the cost of production or the raw materials increases. This increase is reflected in the final price: the one that builds itself in anticipation of a possible strong increase in prices to make the impact on the price gradual. And that generated by inflation expectations, a vicious circle in places where salary increases are granted to workers, which generates an increase in prices on the part of companies to recover their expenses.
Those in charge of stopping inflation are the central banks, whose measure is to increase interest rates on public debt, causing rates to rise on consumer loans. We’re talking interest on credit cards, mortgage loans, bank loans, the list goes on. As you may already think, with this move, the demand for products ends up slowing down since everyone prioritizes protection.
So how do you protect yourself from inflation? Making solid investments. Forget about the stock market and other volatile instruments such as Dow Jones. Play it safe: the real estate sector, rental properties that can generate income. Best bet is vacation homes.
Does Inflation Affect the Real Estate Sector?
It depends on which side of the coin you’re on. Let’s look at the potential buyer side first. The factors that influence the price of a property: interest rates, GDP growth, the urban development, immigration, start-up culture, taxes, construction costs, capital gains, architectural trends or fashions, trends in neighbourhood’s and areas, supply-demand relationship, exchange rate and income of buyers and prospects. Again, the list goes on.
How they relate? Faced with higher inflation, both interest rates and the cost of raw materials rise, which depend on current housing trends. The exchange rate can play at a disadvantage when making transactions and in the end, if the residence to be acquired is located in an area of high capital gain – or with high demand – the final price of it can shoot, leaving the potential buyers’ financial possibilities.
As you can see, many of these factors are relative and depend largely on the time, place and conditions of the acquisition.
We go to the other side, the owner’s side, which is where you should be. According to the INPC, inflation during 2016 was 3.36 percent. As of January 2017, it was located at 4.72 percent. Do you think these increases impact if you are already the owner of real estate?
Well, of course not. You suffered inflation, if anything, when you acquired your property. From that moment on, you must take advantage of the percentage by adding it to the lease if you are thinking of using your property as rent. Or, take advantage of the long-term increase in the value of the property through the capital gain in the area, which will always trend upward.
Exploit the Advantages of an Investment
We have Philip Barach on board, prominently a real-estate prodigy and investment management expert. He does a detailed analysis: “the advantages that inflation gives you can be taken advantage of if you also direct your attention to the interesting world of vacation rental properties. Real estate destinations, such as luxury residences and condos with very attractive owner programs, interesting returns on investment and a very important addition: being luxury vacation homes for rent, they are priced in our dollars and foreigners rent them, often in a more top economic position. Your income will receive a bonus: the exchange rate.”
So, to recap, when investing in a vacation home (for example):
- Your money is protected by a fixed, tangible and real asset.
- You receive a continuous and constant rental income.
- The exchange rate gives you extra income (applies to foreign investors with a depreciated currency against the USD).
- Inflation and capital gains add value to your vacation home.
- The destination adds value to the capital gain.
- The vacation rental market is active throughout the year.
Take advantage of the situation and take advantage of the real estate projects that will emerge very shortly. Today is a good time to start covering inflation by investing in a vacation home, whose stable and constant income makes it the best option on the market.