Inflation: a sustained increase in the general level of prices for goods and services. In more lay terms, it means as time goes on and inflation goes up, your buying power becomes less and less with the same amount of money. Remember in the mid-90s when $1 million dollars seemed like you were ready to retire for life? Fast forward to 2019 and that same amount seems like it would barely suffice for a few years. Here's an example. In 1995, what you could buy with $1,000 would now cost between $1,650 and $1,700. That's a 65% cumulative rate of inflation over 24 years. Doesn't sound too terrible.
Let's take a bigger item. If you were buying a house for $250,000 in 1995, in 2019 it would require $419,000 — or more. Keep in mind, this doesn't consider any appreciation that the home has acquired. It solely takes into account the spending power and value of the dollar that has been changed due to inflation. The question becomes, how can you fight and even profit from inflation?
The answer: real estate.
First, let's evaluate how you actually lose to inflation through traditional investments. For many people, we evaluate what we will need to retire based on our current lifestyle. If we're making $100,000 a year, we might begin investing and set up our accounts based on what we deem will be comfortable. However, if you began a retirement account in 1989 with a $100,000 salary in mind, in 2019, you would actually need $209,910.82 due to the cumulative inflation rate of 109% over the past 30 years. Beyond that, the fees charged to manage many retirement accounts completely eat up the funds required to keep up with the inflation rate.
As one finance expert put it, this steady increase in pricing wouldn't seem so challenging if the purchasing power of a dollar rose alongside it, but that's not the case. "The only way to battle inflation is to make more money, but for most U.S. workers, real wages — that is, after inflation is taken into account — have been stagnant or even falling for decades (the famous middle-class squeeze)."
Now, let's evaluate real estate as a tool to fight inflation and produce cash flow now and in retirement. Real estate investments are often seen as inflation hedge investments. Inflation hedge investments are typically assets that are expected to increase, or at least maintain, in value over a period of time. This plays into three aspects that make real estate a great tool to fight inflation: appreciating value, increasing income (rents) and depreciating debt.