If you haven’t yet been through a period of economic turmoil as an investor, you may be wondering how inflation and rising costs of living will impact you. This question is especially important for real estate investors, as you’ve probably got a significant amount of capital tied up in your portfolio. The good news is that for each negative impact inflation can have on your investments, there is generally an equal and opposite positive effect that will come into play. Today, we’re exploring five of these follow-on effects from inflation:
A Possible Decrease in Security
In a shifting market, there is a strong possibility that you may experience a decrease in security. Tenants experiencing financial hardship may not be able to pay their rent, which can affect your back pocket and ability to manage expenses.
Many real estate investors are hedging against this issue by purchasing commercial property for sale in Melbourne and other major cities. However, you should always seek professional financial advice before making major decisions.
Increased Expenses
Another impact inflation will have on your investment is that the cost of maintaining your rental property will also increase. A cost of living crisis is currently sweeping the world, so no matter where you live, you’ll likely see an increase in mortgages and extra charges on any bills you include in the contract for your tenants.
Rent Hikes
Another impact of the current inflation rates is that rents will likely increase. While this upward trend can mean higher income from your investments, you’ll need to determine whether it is worth raising your rental rates next time a tenant’s lease is up for renewal.
If no one can afford to rent your house or apartment, that doesn’t help you or your tenants. Even if you do increase your rental rates, you’ll also need to factor in the loss of any offsets and increased taxes. So, be sure to do the relevant calculations before making any decisions.
Shifting Tax Obligations
While we’re on the topic of taxes, inflation is here to remind you that having a qualified tax accountant on your side is always a good idea. As your profits and costs shift in relation to each other, you’ll likely find that your tax obligations also change.
Some real estate investors may end up owing less. However, if you up the rent, you’ll probably be liable for more. The good news is that a registered tax professional will be able to handle all of this for you and ensure you don’t end up on the wrong side of the tax department.
Shaken Confidence
Finally, and possibly most importantly, if you’re looking to capitalise on the current situation, investor confidence will be shaken in many cases due to the rising inflation, so this could be your time to strike. You’ll obviously need to perform a risk/benefit analysis. However, it’s generally true that uncertain times can be ideal for doubling down on your strategy and expanding your portfolio. If you have the funds and the risk tolerance, you could do incredibly well for yourself.
Inflation is doing its best to make a mess of everything it touches, but that doesn’t mean you have to let it ruin your investments or strategy. As long as you’re aware of the possible risks and have a plan to mitigate them, you should come out of this economic uncertainty in a strong position. In fact, you may even find ways to benefit from it.
