Investors are understandably jittery with inflation at 40-year highs and recession gaining momentum.
With a volatile stock market, investors are faced with three choices moving forward:
- Retreat and sideline their capital.
- Continue with the Wall Street madness.
- Find an alternative.
For investors searching for an alternative to Wall Street, Warren Buffett offered some advice on the ideal asset to invest in during inflationary and recessionary times.
In a 1981 letter to shareholders on what to invest in during inflationary times, Buffett stated that the ideal asset:
“Must have two characteristics: (1) an ability to increase prices rather easily without fear of significant loss of either market share or unit volume, and (2) an ability to accommodate large dollar volume increases in business (often produced more by inflation than by real growth) with an only minor additional investment of capital.”
Buffett expounded further on this idea in 2015; during a shareholder’s meeting, he stated that real estate is one such asset that performs well during inflation marketwatch.com.
Investing in real estate as a buffer against inflation is rooted in investing for demand – especially in assets with the greatest demand. And the assets that will have the greatest demand – even during downturns and during times of inflation – are essential assets tied to basic needs like housing, food, and fuel.
Not all real estate performs equally during inflation, but one segment has proven its resilience repeatedly and is proving to be a superstar during this time of high inflation. That segment is multifamily, which not only weathered the COVID storm as well or better than any other segment, but is also demonstrating its worth now amid record inflation.
According to CBRE’s 2022 U.S. Real Estate Market Outlook, multifamily quickly recovered from the COVID-induced recession in 2020 – noting that the U.S. multifamily sector finished 2021 with overall occupancy and effective net rents above pre-pandemic levels. While certain markets face challenges, the sector’s overall health is leading to a record 2022.
Industry experts across the board echo a record-setting 2022. Just how vibrant has the multifamily sector been?
According to Greg Coulter, managing member and founder of Income Property Organization in Bloomfield Hills, Michigan. He’s never seen more activity in this sector. That’s coming from a guy who’s worked in commercial real estate for a long time.
“I’ve been doing this for 31 years. I’ve never seen anything like what we’ve had in this sector in the last 24 months,” Coulter said. “Demand is high. Capital is out there everywhere you look. It’s been incredible in multifamily.” And there are few signs that demand for multifamily space, both among renters looking for a place to live and investors searching for a safe harbor for their dollars, is ready to slow anytime soon. Asked to explain multifamily’s lasting appeal, Coulter responded, “People always need a place to live.” Rafter, Dan, No slowdown in sight: Investors, renters remain on the hunt for multifamily space, rejournals.com (Aug. 18, 2022).
One of the leading tenets of investing embraced by savvy high-net-worth investors (HNWIs) is to invest in demand. You can never fail by investing in something that will have sustained demand in good times and bad. And what is an asset poised to thrive during high inflation and recession? Multifamily, as the data has demonstrated.
In times of inflation, you need to allocate capital to an asset that keeps pace at a minimum with inflation. Otherwise, your capital will be swallowed up by the eroding effects of inflation.
As a hedge against inflation, some traditionalists will suggest fixed income assets such as Certificate of deposits (CD’s), money market accounts (MMA’s, high yield savings accounts (HYSA’s), treasuries, and fixed annuities as a way to combat inflation. Inflation carries too big a sword for these types of assets to compete with. Based on June’s reported inflation rate of 9.1%, even the best performing of these assets fails even to yield half the rate of inflation. At current inflation rates, in the best scenario – a 5-year CD paying 3.35% – your portfolio is eroding at a rate of 5.75% per year.
Multifamily gives you the best shot at keeping pace with or exceeding inflation. It’s experiencing sky-high demand right now without any signs of slowing. These types of high-demand assets are ideal hedges against inflation because increases in rents to match inflation will have little effect on demand. That’s why Warren Buffett identified real estate as an ideal asset for investing during inflation.
The time to invest in multifamily is NOW. The time to invest in multifamily is all the time.
It’s no secret why the wealthy gravitate towards multifamily. By generating consistent cash flow in good times and bad and reliably appreciating over time, it’s not hard to see why multifamily is an ideal asset for investing during inflation.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.