I just read an article through MarketWatch on how inflation is easing, but the price of some grocery items is still expected to soar in 2023. The article stated that in December, the inflation rate fell to an annualized 6.5% from the 7.1% rate recorded in November. Honestly, though, most people care more about protecting their money against inflation versus its current rate. I will first go over inflation and what it is, and then why investing in apartment buildings (Multifamily) may be the best hedge against it in 2023.

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What is Inflation?

According to Investopedia, inflation is a rise in prices, which can be translated as a decline in purchasing power over time. For example, if inflation raises 7% for a year but your raise from your W2 was only 3.5%, you took a pay cut that year because some of your purchasing power was diminished.

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Why I Think Multifamily Is The Best Hedge Against Inflation In 2023

Multifamily and real estate, in general, offer cash flow, which most other investments do not provide. Investing in apartment buildings as a passive investor also provides tax advantages such as bonus depreciation which is going up to 80% this year, and cost segregation which is a commonly used tax planning strategy that allows investors to accelerate depreciation deductions and defer federal and state income taxes on a property they either, constructed, expanded or renovated.

Looking at history, you will also see that Multifamily has always appreciated in value over time. Multifamily is a hard asset that isn't liquid. Still, over the time of your investment in the property, you will receive monthly or quarterly cash flow as well as benefit from capital events such as refinances, which can pull out a decent majority of your initial investment tax-free since it's not "income."

Multifamily also has better economies of scale than if you started acquiring single-family houses one by one. Single-family houses have a very subjective value if you think about it because someone is basing the value of your home off what the property next to yours or across the street sold for. In Multifamily, it's based on the value added to the building and the location, which determines the property's value.

Summary

I believe Multifamily is the best hedge against inflation in 2023 because it offers cash flow, tax advantages, and better economies of scale. It is truly passive when you invest as a limited partner (LP) or passive investor because you're not having to personally oversee any renovations or anything else going on with the property, such as doing due diligence and placing tenants.

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