Let’s say you have $100 in a savings account that pays a 1% interest rate. After a year, you will have $101 in your account. But if the rate of inflation is running at 2%, you would need $102 to have the same buying power that you started with– you lose buying power. Any time your savings don’t grow at the same rate as inflation, you will effectively lose money. Real Estate however has the advantage of helping you beat inflation.
Consider that the average national annual rent increase exceeds the rate of inflation. For example, in 2022, the average rent increase in Virginia was 11.95% (according to creditkarma.com). From 2017 to 2022, the average year-over-year increase in rent was 5.77% nationwide, with the biggest increase occurring from 2021 to 2022 at 14.07%. The average rent of a one-bedroom apartment rose from $941 in January 2021 to $1,169 in June of 2022, and the average rent of a two-bedroom apartment rose from $1,078 to $1,339.
The two key factors in rent increases are:
- Supply and demand– Rents tend to be higher in areas where demand is high and lower in places where demand is low.
- Mortgage rates– Rising mortgage rates may price would-be homebuyers out of the market, creating even more demand for rentals.
With these numbers in mind, owning hard assets (such as real estate) right now is something wise investors are focused on. Furthermore, when you buy a piece of real estate to live in, this asset becomes not just an investment but an ESSENTIAL NEED. We all need shelter. If you can combine an asset/investment with an essential need – one that has historically weathered inflationary times well – buying a home even in the current interest rate environment might make more sense than ever.
Real estate is only one way to grow your wealth but it is one of the easiest ways to invest and save — after all, owning your home is essentially a forced long-term savings account. It allows you to take advantage of tax incentives. And once you have equity, you can use low interest rates to borrow and use it to refinance your car loans, student debt, and/or transfer your credit card debt.
So, renters, while homeownership may be a long-term goal for you, I’d encourage you to take the steps now to be in a position to buy a home as soon as you’re able. Be sure to check out our best tips for relatively painless ways to save up for a home. And of course, reach out to us anytime if you’d like to talk about your options. We’d be happy to help!