All in all, 2022 wasn’t a great year for investors. The stock market experienced a 16% decline year over year and many dips into a bear market. Things weren’t much better for real estate. The median home price hit its greatest peak in history before dropping sharply as home sales sputtered in an environment of rising inflation and interest rates.
Many real estate investors have waited for better buying chances during the past few years due to the high prices, high cost of borrowing, intense competition, and extreme economic volatility. The good news is that 2023 might mark a fresh real estate investment boom. In this post, we’ll discuss why.
Why 2023 could be a great year for buying real estate
Red-hot real estate markets are great for those who already own investment properties because they benefit from rising values and higher demand. But it’s not the easiest time to acquire new properties. High competition means you’re battling multiple offers that often exceed your desired purchase price. It also means you’re likely paying more for the property.
Price isn’t the only factor that impacts the profitability of a real estate investment. Demand, cash flow, and cost of borrowing are also important factors that directly determine an investment’s return. But the price is a big piece of the equation. Prices are still positive, but many experts and analysts predict a negative trajectory for 2023.
Goldman Sachs is predicting home price growth could stumble to 0% in 2023. Other analysts are more optimistic, saying demand and prices could continue to grow as long as rates don’t keep climbing.
Already, there has been a noticeable drop in demand, which has reduced market competition. Also, there has been a significant increase in inventory, which has slowed the rate of home price increases and is anticipated to continue in the coming year. All indications point to a slowing housing market in 2023, which may or may not be accompanied by a recession. In other words, it can be a great time to buy to acquire rental properties at a discount.
However there are some things to think about In spite of possible price decreases in the upcoming year, rising interest rates will continue to be a problem. Regarding the federal funds rate’s continued increase in 2023, the Federal Reserve has adopted a hawkish position. Although it doesn’t set mortgage rates, the federal funds rate has an impact on them.
Mortgage rates for a 30-year fixed-rate mortgage for an investment property were around 7% at the beginning of December. If the Fed keeps raising interest rates to curb inflation, it might easily increase by another two to three percentage points in the upcoming year. Increased interest rates result in greater monthly mortgage payments, which reduce the property’s cash flow.
Demand for rentals is also declining. Due to the possibility that the rental rate you acquire in 2023 would be significantly lower than market rents today, investors should exercise extra caution while doing their numbers on an investment property in the upcoming year.
You shouldn’t let those issues deter you from investing nevertheless. During the Great Recession, the number of rental vacancies and the desire for house purchases both reached one of their all-time lows. Nonetheless, the years that followed were some of the finest in history for buying real estate. We’re still a long way from a significant housing correction like the one we experienced from 2008 to 2012.
The secret is to concentrate on cash flow and risk reduction when you’re purchasing. Over a 10- to the 20-year period, those who bought the property with the long term in mind have profited handsomely, and it’s probable that 2023 will present possibilities similar to those.
To succeed in real estate investing, you must comprehend the following fundamental ideas:
Continue to be inventive
The best real estate investors see profit opportunities everywhere. The capacity to perceive creative funding is especially important in today’s industry.
Always be aware of all of your possibilities
Real estate investing is a high-stakes game by definition. Never make investments that you do not fully comprehend. Understanding what you’re doing is critical to your success. For instance, you may not be aware of the advantages of claiming a rental property depreciation and how it can benefit you. Read more here to learn.
Investing in your education can yield higher returns
To be successful in real estate investing, education and networking are essential. Real estate investors frequently invest in properties that return many times their initial investment. Consider your education in this light as well. The ability to use a strategy appropriately can result in significant rewards. Of course, if critical resources are not used, you may suffer a loss.
Seek a good market
A strong market climate is important to season real estate investors, but if you are a novice investor, you will need to shed some light on this element. It can get even worse if you have an adjustable-rate mortgage because interest rates might keep rising and you will wind up paying more even if you can’t afford it. Such circumstances reduce demand for the overall real estate market in specific places.
Possibility of negative cash flow
Real estate, like many other investments, has the potential to generate losses. When you finish a transaction with less money than you started with, you’ve created negative cash flow. And too much negative cash flow can bankrupt you. As a result, you must understand how to locate and evaluate a solid real estate investment. If this is a skill you are developing, hiring the services of a real estate investment firm can help you lower your risk and save time.
One of the most significant impediments to investing in real estate is a lack of funds. Even if you can invest in real estate without using your own funds, you will still require funds from somewhere. There are numerous inventive methods for obtaining other people’s money (OPM) to complete a transaction, and many excellent books have been written on the subject. The usage of corporate credit is one of the most recent versions of OPM.
Some forms of investments, such as distressed and repaired properties, necessitate more time than others. Some forms of investments necessitate your availability during business hours. If your normal job consumes the majority of your time, it may be tough to find time to invest in real estate. Learn the time commitment required for various sorts of real estate investments so that you may plan your day around your investing.
An exit plan is required
Before you get into a transaction, you must have a viable plan in place for disposing of your investment property. Take note of the phrase “possible,” because your departure strategy must be rational and doable; otherwise, it is not a good exit strategy. Your strategy could be to fix and flip the property straight away or to lease and hold for ten years.
Make sure you have a clear and detailed exit strategy in mind before you invest. And always have a backup plan in place in case anything beyond your control happens. Real estate investing, like any other type of investing, carries some dangers. On the plus side, these risks are accompanied by the possibility of large rewards. Yet, with good planning and continued knowledge, you may succeed as a real estate investor.