4 Inflation Hedge Strategies for Apartment Investors

An inflation-resistant investment will maintain its value in the face of rising prices. This is an important consideration for investors, as inflation can erode the value of your money over time. Many investments – particularly stocks and bonds – are subject to the effects of inflation, which can decrease purchasing power and lower the market value of your investments. As an investor, you want to minimize your exposure to the effects of inflation. 

Investing in apartments that are not subject to inflation can be a smart strategy to protect your investment. The biggest reason apartment investments are resistant to inflation is that rents tend to increase when the cost of everything else goes up. In other words, rents are protected against inflation. And, historically, rent is one of the most accepted costs of living that are absorbed in every economic cycle. Yet, investors in apartments must still be very strategic in selecting the properties in which to invest. 

Here are 4 strategies for selecting apartment investments to help you avoid inflation while maximizing your returns.

First, investing in a stable neighborhood is important.

The location you choose for your investment will have a significant impact on its long-term value. Investing in an area that is considered stable and safe is a good place to start when looking for investments that are both resistant to inflation and in high demand by renters.

Choose an active market – Cities with high rates of population growth will have a high demand for rental units, which means higher rental rates for you and more potential returns on your investments. When searching for a market for your apartment investments, look for a city or region that has high job growth and low unemployment. This will ensure a strong demand for rental properties in the area.

Second, look for properties that do not require a higher amount of capital improvements for structural or deferred maintenance issues.

While some amount of structural capex is to be expected, those offerings that allocate 30% or more (of raised funds) to deferred maintenance or other structural issues tend not to fare as well in higher inflationary environments. This is because of two very important aspects. First, the reliability of expense projections for larger capex projects (complete roof replacement, large-scale plumbing or electrical projects, or building rebuilds) can be a challenge when all costs are increasing due to inflation. Secondly, structural capex investments do not practically increase the NOI of the property—and improving the NOI is one of the main drivers of valuation growth in apartment properties. Instead, offerings that are allocating more money to the improvement of interiors and amenities will be better able to increase NOI through increases in rents and, hence, increase their value even in times of high inflation.

Third, look for investments that offer good opportunities for occupancy growth and cash flow enhancement over time.

While investing in a property that has 97% occupancy may offer stability, it may not have the value growth needed for investors to thrive in times of high inflation. Instead, look for properties that offer opportunities for occupancy growth and/or ongoing operational enhancements that could improve the NOI of the property over time. While this does not mean investing in distressed properties with 70% occupancy, investors should look to properties with submarket occupancy, but that are well-positioned for growth in terms of demand and pricing. The key is to ensure the operators have a precise, experience-based business plan to improve occupancy in the first 12 months and the potential for meaningful NOI improvements as a result of their strategy. Investors who can deliver on this front will be well-positioned for future value creation regardless of the market environment.

Fourth, look for investments that offer an attractive risk-return profile, as well as the potential for long-term capital appreciation.

While investments in stabilized properties with lower cap rates offer lower volatility and lower overall returns, they may not have the growth potential needed for long-term investors to thrive in times of high inflation. Investors will want to consider opportunities that have more attractive Annual Rates of Returns and Total Returns. That may mean investors need to look away from the “shiny object” of a class-A, brand-new property in a ritzy suburb of Atlanta and instead focus on more working-class properties in secondary suburbs that have the potential to produce higher returns over the longer term.

In conclusion, we believe that the combination of these four factors will help investors achieve better returns in uncertain economic times. By evaluating each investment individually based on the four factors above, investors can best position themselves to deliver returns even when inflation erodes wealth placed in other asset classes.

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