“We are seeing substantial inflation,” announced Warren Buffett at his company’s recent annual shareholder’s meeting. “We are raising prices. People are raising prices to us, and it’s being accepted.”
Buffett didn’t seem overly concerned because his companies can pass higher prices onto consumers. The stock market took the news with a grain of salt as well.
Why isn’t inflation—or the fear of inflation—having its normal effects on the markets? Typically, news of inflation spooks the market, triggering sell-offs as investors anticipate a slowdown in business, eventually denting the bottom lines of their portfolio companies and their associated stock prices.
However, that hasn’t happened so far. Why? Because of the stimulus.
Stimulus-fueled demand is bolstering both the economy and the stock market right now, but many economists don’t expect that to last. Many don’t expect another stimulus check, and all the new money that’s been pumped into the economy the past year will finally come to roost in the form of inflation, resulting in slowing consumer demand and a stock market correction.
In any other year or period, the Fed would typically step in and raise interest rates to cool the economy and corral runaway high prices. However, with its announcement last year of its new about-face policy to keep interest rates low—even in the face of inflation—it is too early to know if the Fed will do anything about rising inflation in the current environment. The concern is that if and when the Fed decides to step in to slow inflation, it will be too late.
Inflation or not, sophisticated investors never wait around for the shoe to drop. They’re prepared for inflation in 2021 because they’re always prepared for inflation.
More about inflation from BiggerPockets
Invest for demand
Some goods and services are demand-inelastic (meaning a rise in prices won’t impact demand) because they’re essential. People will always need shelter, food, transportation, fuel, medical care, etc. Rising prices don’t necessarily result in a drop in demand for these goods and services.
Warren Buffett is not concerned about inflation right now because consumer demand is sky-high across the board. Still, when stimulus money runs out and reality hits, consumers will cut back on spending on non-essential goods.
The Great Recession and the COVID-19 downturn of 2020 proved that specific segments, like affordable multifamily and mobile home parks (MHPs), are recession-resistant within real estate. Already in short supply, demand for multifamily and MHPs will only rise in an inflationary environment where consumers look to downsize.
Investing in properties with rents that rise in step with inflation without a decline in demand is the ideal counter to rising prices.
Long-term income over short-term rehabs
Investing for income long-term instead of thinking short-term with fix-and-flips will ensure consistent, reliable income independent of the underlying value of the property. While the housing market is currently experiencing unprecedented demand, this may cool with inflation as well—along with a slowing economy and stock market.
Since single-family housing is the real estate sector most correlated to the broader market, wise investors turn to less correlated commercial properties like multifamily, MHPs, or senior housing to insulate against potential downturns.
Existing assets over new builds
Investing now in existing assets will shield you against rising prices that will impact new builds. Already facing rising lumber and material costs, new construction will only get costlier with accelerating inflation. So why not lock prices in now with existing assets instead of rolling the dice on increasing prices with new builds?
Key submarkets over top MSAs
As the Great Recession and the COVID-19 pandemic demonstrated, not all markets are equally impacted by a downturn. Primary gateway markets typically bear the biggest brunt of economic downturns as residents flee expensive, high-tax urban metropolitan statistical areas (MSAs) for secondary and tertiary MSAs with lower taxes and costs of living.
Just look at the exodus of workers from California and New York last year for proof. Follow the migration, and you can’t go wrong.
Inflation is already here. While the rest of the investing public shrugs its shoulders, wise investors shouldn’t wait to assess and readjust their portfolios to plan for inflation in 2021 and beyond.