Inflation 101 and Why Physicians Should Care
“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” – Ronald Reagan
Inflation seems to be on everyone’s mind these days, and it’s no surprise. Food, gas, childcare…everything seems to have gone up in cost.
The one thing that doesn’t get talked about alot in medical circles is that doctors are directly affected by inflation. When the cost of goods and services increases, workers’ wages generally also increase in tandem. But because of the way healthcare financing works in the US (where medical reimbursements are fixed, directly or indirectly to the Medicare pay rate), physicians are essentially on a fixed income….and those with fixed income get hurt the most during inflationary periods.
For physician services, the Medicare statute specifies annual payment increases, and for the calendar year of 2022, that number is 0%. Yes, you heard it right…0%. So despite inflation currently raging at>8%, our services as physicians get a 0% bump. So as doctors, we must pay attention to inflation and control what we can control.
First off, what is Inflation?
Simply put, inflation is when things cost more than they used to.
Inflation is when prices increase and the purchasing power of money falls. Your money buys less goods and services than you used to be able to. Every dollar you have today buys less tomorrow.
Inflation is like that suction pump in the OR that sucks into your hard-earned money. In the 1970s, $1 can buy you 4 cups of coffee. That same dollar today can’t even buy you a full cup to get you through the day in the clinic. The coffee didn’t get any better. The price was driven up by inflation, which nibbles away at the purchasing power of money.
Why does inflation happen?
There are two primary causes for inflation. The first is called “cost-push” inflation. This occurs when prices rise due to an increase in the costs associated with production of goods or services. Think about your iPhone and all the parts required to make it. If the cost of the computer chip or battery increases, Apple will eventually pass along those costs to you.
The second kind of inflation is “demand-pull” inflation, when demand for goods or services exceeds the supply. Remember when toilet tissue was a hot commodity during the pandemic?
Now that you know why inflation happens, here’s why you should care (and how to best protect yourself).
What Does Inflation Mean for You?
Let’s break down how inflation affects you…
Say you’re earning 1% in a savings account (and that’s being generous…most current savings accounts earn you 0.6% at most), while inflation is growing at 8%. When you look at your bank account, you may think you’re 1% richer, but in reality you’re 7% poorer!
1 – 8 = -7 (Yay for simple math!)
Wait, what…really?
Yup. Because the value of goods and services is growing by 8%, but your money is sitting there in a savings account only growing by 1% during that same period, you’re actually LOSING money. That #inflation bug is slowly eating away at your money in the bank.
This is why it’s important for you to pay attention to inflation, and to figure out a plan to at least keep up with inflation and maintain the purchasing power of your hard-earned money.
Why Is Multifamily Real Estate a Good Hedge Against inflation?
An inflation hedge is a type of investment that protects against the decreased purchasing power of the dollar. The ideal investment is one that maintains or increases in value during inflationary periods.
Real estate is an asset class that has a long-held reputation for being an inflation hedge. Multifamily real estate, in particular, does particularly well in an inflationary environment due to three main reasons:
- Growing Demand: When inflation rises, interest rates rise along with it, which puts upward pressure on mortgage rates. Homeownership becomes unaffordable for more people, and there is an increase in demand for rentals.
- Increasing Rents: When inflation rises, rents also tend to rise. Since apartments have short leases (typically no longer than one year), there is an opportunity to respond to inflation quickly and increase rents accordingly. In contrast, office, retail and industrial properties have longer term leases (often locked in for 5-20 years), so they cannot respond to inflation as quickly.
- Appreciating Value: The cost of new construction moves directionally with inflation, and high inflation means higher replacement costs. Increases in lumbar, wood, steel and labor make new development projects more expensive, which limits supply and causes existing assets to appreciate in value.
A Quick Example of How Investing in a Multifamily Syndication Can Hedge Against Inflation
Let’s take a quick look at how investing $100K in a real estate syndication can help you at least breakeven and even build wealth through inflation. Different syndication offerings differ in their return profiles, but let’s use some average numbers for illustrative purposes.
Say you invest in multifamily real estate syndication with a 5-year hold, a projected equity multiple of 2x and averaged annual return of 18%. You’ll receive continuous cashflow plus profits upon sale of the property, totaling an 18% average annual return over the 5-year period. So in five years, you’ll get back the original $100,000 you invested plus another $100,000 through cashflow and the profit from the sale.
With an 18% annualized return, you have a good buffer above the 8% inflation rate (i.e. 18 – 8 =10%). So as you can see, investing in a syndication can not only protect the value of your money, but actually help you build wealth in the process. Contrast this to letting your money sit in a bank account, where you are losing money every day.
What’s Next? How To Take Action To Protect Your Money
Inflation is at a 40-year high, and shows no signs of slowing down anytime soon. Hopefully this article illustrates how inflation is affecting you, and of the need to take action now to protect your money to at least keep up (and hopefully outpace) inflation. Unfortunately with the current medical system, physician autotomy keep shrinking and there’s very little we can do to influence how physician reimbursements are determined. But we can take full control of how we protect and grow our money.
Here at Clear Vision Investing, we’re here to help you learn about and invest in real estate so you can beat inflation. Feel free to reach out if we can help in any way.
