The US dollar is, and will always be the number one currency in the world. However, that says nothing about its ever-changing valuation. The US dollar was one of the strongest in 2022, but recently as a result of inflation and the FED’s aggressive moves on curbing inflation have caused the dollar to weaken.
Now, how do you know whether a US dollar is strong or weak? You look at the US dollar index. The US dollar index is the benchmark that compares the US dollar value against other widely-traded international currencies. This index helps investors understand the relative strength of the dollar.
A weak US dollar can have a potential impact on passive real estate investors and can be good news for them. But wait, why would a weak US dollar be good for passive real estate investors? We will find this out in today’s blog.
What is a Weak Dollar and Why is the US Dollar Weakening?
A weak dollar means that the value of the US dollar is decreasing compared with the other currencies.
The dollar loses value when the US economy is on a downward trend compared to the rest of the world. The current trends of consecutive interest rate hikes and inflation have caught up on the economy, decreasing the purchasing power of the consumers, and leading to a weak dollar.
Weak Dollar, Inflation and Multifamily as a Hedge Against Inflation
A weak dollar is accompanied by inflation. As the purchasing power of the dollar decreases, inflation rises. Multifamily has long held the position of acting as a hedge against inflation due to its rental income potential and demand stability. Whether the economy shrinks or expands, what stays unchanged is the need for shelter. Thus, multifamily investing stays strong even during inflation and in fact, it outpaces the inflations, as the rise in inflation further increases the rental rates, driving up the property’s value.
How a Weak Dollar Drives Up Rental Demand?
When the dollar is going down, central banks may increase interest rates to control inflation and stabilize the economy. Higher interest rates mean higher mortgage rates. This could make people less interested in buying real estate, which might slow down the growth of property values or even cause them to drop, depending on the supply and demand dynamics.
But, this has another upside for multifamily investors. As prospective home-buyers are discouraged from buying a house, demand for rental units increases, which further strengthens the multifamily investment returns.
A Weak Dollar Creates a Buying Opportunity in Multifamily Assets
When the property values decline for reasons other than the operative ones, it creates a good opportunity for the investors to acquire the multifamily property. Investors see a chance to purchase real estate properties at discounted prices and then benefit from the future cap rate compression.
When the value of the US dollar is low, it attracts a lot of foreign investors to the multifamily property market. This influx of investors helps balance out any downward pressure on prices.
Multifamily Investing Stays Strong Despite the Currency Fluctuations
Multifamily investments stay safe investment despite the economic fluctuations because of the potential for steady and recurring income with regular cash flow, property value appreciation, and annual tax benefits. The pandemic emphasized this reliability. Despite COVID-19 causing economic turbulence, one thing stood strong: investments in essential needs like shelter.
As the US economy continues to stay unpredictable with the FED tightening its monetary policy each month, it’s a good time for passive investors looking for security and scalability to explore multifamily syndications.
Conclusion
To sum it up, when the dollar’s value drops, it can bring both good and bad impacts on real estate values. On the positive side, it may attract more foreign investors and act as a protection against inflation. However, there can be downsides too, like higher interest rates that affect affordability and demand. The specific effects on your real estate value will depend on local market conditions and economic factors.
It’s too early to say whether the recent dollar weakness is a long-term trend or a temporary blip. But remember, everything in the markets follows cycles, whether it’s returns on different types of assets, economic growth, or long-term currency fluctuations.
If you’re ready to put your money to work for you in real estate, without the hassles and time commitments of being a landlord, then we’d love to walk you through the ins and outs of this strategy – investing passively in real estate syndications. Schedule a call with us so we can get to know you and your goals a bit better and draft your investment strategy to align with them.