5 reasons why investing in apartments is a good hedge against inflation.
1. INTRINSIC VALUE. While there is an intrinsic value to many tradable investments, apartments, as a durable good (meaning they yield services and utility over time), have a more easily defined intrinsic value: the buildings and the real estate. Intrinsic value increases over these with consistent financial performance.
2. RENT INCREASES. Rental rates adjust upward with inflation in most cases, especially in markets where supply is reasonably low. Many apartment professionals believe the country will see an apartment shortage as early as 2011. If this is the case, rental rates could outpace inflation in some markets.
3. ATTRACTIVE FINANCING. If an investor chooses to borrow money, apartments are one of the only remaining real estate classes where you can still maximize the loan-to-value ratio. In fact, some would argue that actually borrowing money at fixed rates is an additional hedge, which is currently an option for performing properties through Fannie Mae, Freddie Mac and FHA.
4. CASH FLOW. Apartments produce cash flow, if not overly leveraged, that can be used to invest in other inflation-hedging investments.
5. TAX BENEFITS. The tax breaks on the income earned from owning apartments can be very beneficial. Tax laws allow write-offs for depreciation and expenses, shielding of income from FICA taxes and deferment of tax on capital gains.
Apartments also provide diversification for a long-term investment strategy as well as hedging inflation. For long-term investors who are willing to ride the turbulence of the current correction, now is an excellent time to invest in apartments.
Source: John Clayton, Senior Investment Advisor, Hendricks & Partners, www.claytonadvisors.com
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|Title Annotation:||Management Insider: Investment Advice|
|Date:||Aug 1, 2009|
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