Many types of real estate investment hinge on the fluctuation of property values over time. One of the most common reasons that real estate prices increase, however, is regular economic inflation, a process by which prices across most sectors of an economy rise gradually.
While inflation can increase the dollar-value of a home, it does not actually profit a real estate investor, as increases related to inflation are offset by the lower buying power of the dollar in other sectors.
Before exploring the role of inflation in house prices, it's important to briefly differentiate between inflation and appreciation. While inflation is merely a general shift in the buying power of any unit of currency, appreciation is the total increase in the price of an asset over any given period of time. Inflation, then, is one part of overall appreciation, which can be higher or lower than the rate of inflation.
The role of inflation in the price of real estate is a topic that has been speculated about for many years. More than almost any other asset, the price of real estate is impacted by a wide range of different factors.
Local, state, regional and national real estate market trends, as well as the state of the wider economy and the job market, all play a role in how any individual piece of property will be priced. With all of these intersecting pricing factors, it is a fair appraisal to say that inflation plays a significant role in the overall appreciation of a property, but can be either offset of exacerbated by other factors.
Though both inflation and appreciation play a part in determining the price of a property, real estate investors are better off pursuing more direct means of adding value to a home. Even under ideal conditions, appreciation in most places rarely outpaces a few percentage points annually, meaning that an investor would have to hold a property for as long as a decade to make a significant return via appreciation alone. Obviously, for serious investors, this is far too long to wait to make a profit.
Why House Flipping Can Work Better Than Waiting for
A much better way of approaching real estate investment is the fix-and-flip model. In this investment model, investors purchase a house that is in need of repairs for a price significantly below its potential market value. Once the repairs are made, the property can be sold, with any difference between the sale price and the total cost of buying and rehabilitating the property remaining as profit.
Each fix-and-flip deal is different, but it is not uncommon for investors to realize profits in excess of 20 percent on a well-structured flipping deal. If you want to get started with real estate flipping, consider checking out Success Path, a well-reviewed teaching program for new real estate investors created by the hosts of the hit television program Flip or Flop. You can check out Success Path reviews to get a sense of what they offer.
Though inflation does play a very major role in the movement of real estate prices, it is not the only determining factor of the value a given piece of property will command on the open market. For serious real estate investors, it is also a fairly minor consideration, as faster price increases than standard appreciation can produce are needed to generate significant ROIs.
Nevertheless, in order to fully understand the real estate market, investors need to take both inflation and overall appreciation into account. This is especially true when dealing with rental properties, as these are usually held long enough for inflation to become a more important factor than in a short fix-and-flip deal.
Anica is a professional content and copywriter from San Francisco, California. She loves dogs, the ocean, and anything outdoor-related. She was raised in a big family, so she's used to putting things to a vote. Also, cartwheels are her specialty. You can connect with Anica here.