Inflation erodes the purchasing power of money over time, making goods and services more expensive. By investing in assets that exceed the rate of inflation, you can potentially protect your wealth and even accumulate wealth at a rate that outpaces inflation.
So, how does an investor know what the best investments to beat inflation are? We discuss whether your property investment is likely to beat inflation.
How is inflation calculated?
Inflation is represented as the percentage change in the general price level of goods and services over a specific period of time. There are several methods to calculate inflation, but the most commonly used one is the Consumer Price Index (CPI). The CPI measures changes in the cost of a basket of goods and services that an average household typically buys.
How can a property investment keep in front of inflation rises?
Nothing is guaranteed in the investment landscape; however, there are several ways that property investments may keep ahead of inflation.
Property values tend to increase over the long term, which may outpace inflation rates. This means that the value of your property may rise, allowing you to sell it for a higher price than what you initially paid, thereby preserving and growing your capital.
2. Rental income
If you buy a property for investment purposes, you may be able to generate rental income from tenants. Rental income can act as a source of cash flow, and over time, it can increase with inflation, especially if you review and adjust the rent periodically. This increased rental income may help maintain your purchasing power.
Property investment often involves borrowing money through an investment mortgage. Many investors use leverage to amplify their returns. For example, if you put down a 20% deposit on a property ($200,000 on a $1,000,000 property) and the property value appreciates by 5% ($1,050,000), your actual return on investment would be 25% ($50,000/$200,000) — 5% of the property value, not just your initial 20% investment). However, keep in mind that leverage also potentially increases risk, so it should be used carefully.
4. Inflation hedge (of sorts)
Real estate is considered a tangible asset, and factors beyond just inflation rates influence its value. In times of high inflation, the cost of goods and services increases, but so does the cost of construction and materials for new properties. As a result, the value of existing properties may also rise, acting as a hedge against inflation.
5. Tax advantages on interest payments and more
In Australia, property investors may be eligible for various tax concessions or advantages, such as negative gearing, depreciation deductions, and capital gains tax concessions. These tax advantages may help improve your after-tax returns and bolster your investment performance.
6. Annual indexation of SDA payments
SDA payments form part of the overall rental income for SDA property investors. The amount of SDA that is payable is determined by multiplying the original SDA amounts by the annual movement in the CPI. With the SDA payments pegged to the CPI, it helps the rental income remains on par with the inflation rate.
Using SDA property investment to tackle rising inflation
It’s essential to remember that, like all investments, property carries its own risks and requires careful consideration and research. Property markets can experience fluctuations, and there are costs associated with property ownership (maintenance, property management fees, taxes, etc.). Diversifying your investment portfolio across different asset classes may help reduce risk and improve your chances of beating inflation in the long run. It’s always advisable to consult with a financial advisor or real estate professional to tailor a strategy that aligns with your financial goals and risk tolerance.
Many investors who look to make a difference in the life of an Australian with disability turn to SDA investment properties. To understand more about how to finance your investment journey and assess the potential impact of CPI rises on your financial situation, contact the team at NDIS Loan Experts.