Inflation is on everyone’s minds this year, with investors scrambling to allocate to assets that can help protect their hard-earned money. Traditionally, investors have long flocked to gold as an inflation hedge. The idea is that tangible assets like gold preserve their value better than other assets during inflationary times. But is it true?

Ideally, as inflation reduces buying power, gold should counter inflation’s effects by increasing value. However, since the 1970s, gold hasn’t produced a positive return during periods of consistent inflation as reported in a December interview by CNBC. Unreliability as an inflation hedge is a big problem. Reliability is the one essential element for serving as an effective investment hedge, and gold fails in this area. The interview also highlights that since November, when the Labor Department reported that inflation climbed at the highest year-over-year rate since 1982, gold had only risen by about 1%.

In the past, the Fed has stepped in to raise interest rates to slow economic growth. The Fed has already signaled its intent to raise interest rates in 2022. Until the Fed acts, inflation will continue to grow, and the only way to keep up with inflation is to grow income that offsets rising prices. That is why gold is not an ideal hedge. Not only is it not dependable on maintaining value during inflationary times, but it produces no income, let alone grow it to counter diminished buying power.

Cash flowing commercial multifamily real estate is the ideal hedge. Rising prices offer the two elements needed to counter inflation - appreciation of the underlying asset and increased income through increasing rents. Higher rents are the “sticky” inflation that is hard to reverse as Bloomberg Wealth reports. That's due to people always needing shelter and the lock-up periods associated with lease agreements. Renters are stuck with their rental rates for the usual 12-month period at a time, and upon renewal, those rates aren't likely to be reduced. This ability to increase rents in commercial multifamily real estate property without diminishing occupancy and revenue is how you counter inflation. CoStar, the best source of information for commercial real estate, projects continued rental growth in the next few years as you can see below. These figures are for all multifamily asset classes across the entire country with primary and higher-end secondary markets seeing even larger increases.

If you’re looking to invest in an inflation hedge, invest in one with a reliable track record of maintaining value and cash flow in the face of rising prices and diminished buying power. Follow demand. Follow the goods and services consumers will always need, and you’ll be led to the same hedging assets smart investors have been allocating to for decades - assets like multifamily.

Let’s connect to see how Bluefox Ventures can help you diversify your portfolio by investing in alternative assets like multifamily real estate.

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