How to hedge inflation if you rent?

Working for a company that compensates you for inflation. If you don't have one - get one.

The best hedge may be investing in an apartment real estate investment trust (REIT), especially one whose properties are mostly located in the region where you live. The value of a REIT depends largely on the amount of rent it can collect. Many REITs are traded on a stock exchange. Unless you have time to study invidual REITs, I recommend purchasing a REIT mutual fund, although its returns may be less correlated to your future rental costs.

Searching Google I haven't come up with any so I'll ask:

Does anybody know of a SF Bay Area based REIT or SF Bay Area based REIT mutual fund? It's well known that home prices there are absurdly high and rents, while high have actually been dropping a bit. I'm working if there might be some value in a REIT there.

Thanks.

After making the original post, that's what I concluded too. However, I'm having trouble finding funds that specialize in apartment REITS, and not home construction speculation. The latter is what you want to avoid.

Any suggestions?

Also, are there ETFs that specialize in apartment REITs?

revheck

Liquidity cost and basis risk will increase the error in the hedge calculation. This estimation error will likely wipe out any benefits of the hedge. Anyway, what you described is not a hedge - it's a leveraged position.

This is kind of an academic question because the amount of cash you have is probably a lot less than what you'd need to truly hedge your potential rent increases. A perfect hedge would be...well, buying a share of an identical building to the one you live in, in the area you live in, so your stream of rent payments received equals the ones you're paying out. Of course at that point you're just buying a home right?

Your principal hedge against inflation is going to be your earnings, unless you have a lot of money to invest. Rents and housing expenditures are tied to wages, even though that's drifted a bit out of line lately. Long-term you can't get blood from a stone and people aren't going to put 70% of their income into housing. And rational people won't keep buying homes when, as the WSJ says is the case here in SF, the cost of renting is 55% lower (their analysis is a little simplistic but the basic point is valid).

I don't think a local apartment REIT is a good idea except in the theoretical sense. If you buy a REIT you'd take on company-specific risks and asset-class risks that are probably much greater than the inflation protection upside from the investment. And again you'd need to make a big investment to generate enough cash to make it a true hedge.

If you really wanted to pursue the "best strategy" for long-term rental, I'd say, rent in an area with strong rent control, and rent a property you really like, that is unlikely or unable to be converted to condominums. Not a hard find here in SF, especially while everyone seems to be distracted, overbidding on $1.1M 2BR condos.

-Tad

property

"Rent control" is theft from landlords. Besides the moral problem of benefitting from theft, some practical issues are that

(1) Rent-controlled apartments have below-market rents and are thus very difficult to find. (2) Landlords have little incentive to maintain rent-controlled properties. (3) A place where rent-control policies are still in effect is likely to have other zany tax and regulatory policies that cost money and reduce the quality of life. New York City and San Fransisco come to mind.

It's funny how one government action favoring stable housing & long-term occupancy (rent control) can be construed as "theft" while another (mortgage interest deduction) doesn't get the same stigma. Homeowners benefit from the theft of tax revenues, renters benefit from the theft of rent control, we're all a den of amoral thieves!

Seriously, I know local landlords who are perfectly happy with rent control because of the stability it introduces into pricing and long-term cash flow projections. You find that buildings are priced according to tenant mix, it's just another factor in valuation. Very much like a stock - either has growth potential, or doesn't. One explained to me that he likes it because it's more difficult to buy when rents have a lot of volatility and you don't know how long they'll stick. Simple economic models bear this out.

And by your reasoning you shouldn't use the products of any regulated industry, whose profits are limited by that regulation...your "theft" of their profits are therefore immoral. Skip the shower today?

This isn't true, you're speaking of one type of rent control and the laws are different in each area that has adopted a rent ordinance. If you rent it's important to understand the rules in your area and rent a property accordingly. Some people here in SF are surprised to find that their building isn't covered by the ordinance (though most are). If you're not covered you should be willing to pay a lower rent to compensate you for the risk. And rents here seem to bear that out to a certain extent.

That's not tied to rent control really. There's a web of laws in every state and many locales that govern landlord-tenant relationships. If a landlord can get away with poor maintenance it has to do with the laws about upkeep, not rent control.

You're right, we've got simply awful quality of life here in SF. And it would have been so much better if the dot-com transplants had driven the last of the normal people out of the city in 1999!

-Tad

you live in, so your stream >of rent payments received equals the ones

To hedge against rent *increases*, I think you just need to invest an amount equal to one year's rent.

Agreed. But what practical investment is better?

They are tied to *average* local wages, not necessarily wages in my industry.

,>rent in an area with strong rent control, and >rent a property

Not an option for me.

A few months ago when I was shopping for REITs, I found myself using two stock screeners:

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   , selecting "Real Estate Operartions(services)." About 247 stocks should come up. Click on each symbol in turn,then go to its profile to see if it's specialized in apartments and where.Yahoo has a fund screener, too, with "Specialty-Real Estate" being a filtersetting.

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   ,set stock sector at "Financial" and the stock type at "hard assets."Morningstar also has a mutual fund screener. The data at both these sites is _not_ always up-to-date.

I am pretty sure all the apartment REITs I've ever seen have properties in several states. I would bet there are REIT ETFs, but I haven't gone looking for screeners for them.

Note: I don't necessarily advocate the plan you are proposing. I hold some REITs to maintain a diverse portfolio and some income. At the moment, I think they're generally somewhat overpriced; they've had a nice ride the last few years, and you should read up on why that is. I'd be very picky if I were you.

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I don't believe there are any REITs that are that specific. The most specific you can get is west coast. And even then, they may include retail and commercial properties.

Here are some sites that may be helpful:

had a nice ride >the last few years.

This is true for construction REITs, but my understanding is that apartment REITs have not done so well.

Well, four apartment REITs (WRI, CLP, ASN, EQR) I have been noticing in the last year are all up 50% or more since 2000. Maybe that's not meaningful; your call.

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