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Why inflation is not necessary a bad phenomenon?

Deividas Urbanovičius
Why inflation is not necessary a bad phenomenon?
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According to the latest Eurobarometer data, almost a third of Lithuanians name inflation as one of the most important concerns of the country. Still, the rapidly rising prices of products and services, according to Deividas Urbanovičius, the head of investments and financial expert of InRento, are not always bad. By investing your money smart, in time you can protect yourself and even benefit from inflation.

Inflation is part of the economic progress 

As inflation rises, money loses its value, so there is a natural need to think about your savings – whether to invest, start a business, or maybe buy something that does not lose its value?

As D. Urbanovičius notes, in Lithuania and other European Union (EU) countries, the fear of inflation is directly linked to low financial literacy. However, inflation also has a positive effect on the economy. It stimulates growth, contributes to new technologies, and develops services that translate into a better quality of life. For example, the European Central Bank aims to maintain 2% annual inflation, as its maintenance is the basis of monetary policy.

"Inflation is the engine of the economy that drives us to move forward, while the reverse process - deflation - when the value of money rises, causes real problems. Why invest money if you can keep it in your account and their value will only increase. Right? However, if there is no money movement, the whole economy simply stops - there are no more buyers, and naturally, producers are also shrinking," explains Deividas.

Although the inflation rate in Lithuania is higher than in many other EU countries, according to the head of investments at InRento, there is a logical explanation for this - the country's economy is still developing rapidly and has not reached the price level usual in Western Europe. Even though the prices of some products in Lithuania have already reached European prices, the prices of services are still catching up, and rapidly rising wages strongly influence their growth.

According to the latest data of the Department of Statistics, annual inflation in Lithuania in January this year, compared to January in 2021, was 12.2% and was the highest since August 2008. However, according to Deividas, such a comparison is not correct due to the comparative base:

"We had quarantine in January last year. As a result, the use of services was limited to a minimum, the population traveled less, so people had fewer expenses. Today, most of the population is vaccinated, most services are working, salaries are rising, people have savings which they now spend."

Investing in lower-risk projects

Rising inflation is making the investment of money a key issue for people with savings. The possibilities are various, and some invest in crowdfunding platforms where they can lend their money for real estate projects under development.

The principle of such investment is simple: the amount required to develop the object is collected from different investors, and a business loan is granted to the developer. After implementing and selling the object, the investors get their money with interest on top. However, such an investment has risks directly related to the return on investment. The object may not be built because of the lack of building permits, more expensive building materials, lack of staff, and it may not be sold as planned. Increased overall risks are one of the reasons why most of these types of crowdfunding platforms promise higher interest rates to investors.

A safer option for those willing to put money into real estate is investing in rental properties.. InRento is the first licensed crowdfunding platform in the EU to invest in existing rental properties. It is a lower-risk product for those looking for a safer investment option.

InRento's crowdfunding platform always has three parties: investors, the project owner (borrower), and the platform itself. After analyzing the project, performing the real estate appraisal, and other necessary procedures, InRento offers the investor community to lend its money to the project owner who intends to purchase the real estate for renting it out. The acquired assets are immediately pledged under the 1st rank mortgage to InRento (the investors who have granted the loan), who receive interest on the rental income each month.

Observing the trends of the last century, the growth of the real estate value is on average 1.2% higher than the inflation rate, so investing in real estate, according to D. Urbanovičius, is a time-tested antidote to inflation. Interest indexation is becoming an equally important aspect of this type of ​​investment. The rental income (interest) of many InRento's rental projects is linked to inflation, so even with the inflation rate in the country growing rapidly, the real return on investment may not decrease.

"Let's imagine that in 2021 the investor received 100 EUR in rental income each month. As we already know, annual inflation in 2021 reached 10.6 percent. Indexation of income would mean that from 2022 onwards, the investor will receive a correspondingly higher amount of 110.60 EUR in fixed interest. In other words, despite the rise in inflation, the real return of an investor may not change," explains the financial expert.

Capital growth - an opportunity for additional earnings

By investing in rental properties, you can earn from interest and capital growth when the assets are sold at a higher price. InRento is the first crowdfunding platform on the market to offer this opportunity to investors.

"The value of an object at the time of purchase and sale may differ. For example, an object acquired today for 300k EUR can be sold for 400k EUR in 3-5 years. In this case, the difference between the purchase and sale – 100k EUR - is divided proportionally between the investors, the project owner, and InRento. If the value of the real estate at the time of sale is less than the purchase price, the project owner is obliged by contract to repay the full amount borrowed from investors," explains Deividas.

When considering investment opportunities, the financial specialist encourages carefully studying all the conditions offered by the crowdfunding platforms and assessing the potential risks that are unavoidable in the field of investments.

Transparency is critical to InRento: "It is very important for us to explain to our investors what can happen with their money. We have developed various features on our platform. We offer projects in the central and developing areas of cities, thus ensuring a more stable value of assets. Still, in the field of investments, the scenarios may be different, so it is always necessary to assess the risks correctly," says D. Urbanovičius. 

Published on DELFI.LT