Is 2023 a Good Time to Invest in Real Estate?
You might be hearing a lot of talk about the price of eggs lately, but what about the cost of waiting to build your nest egg?
It can feel treacherous to invest in anything right now. Inflation rates have been their highest since 1982, currently ranging from 6.4% – 7% since 2021, a stark change from 1.4% in 2020 or 2.3% in pre-pandemic 2019.
The Federal Reserve, in an attempt to get inflation under control, has continued to lead to higher interest rates. The Fed rate was most recently updated on February 2, 2023 to be 4.50% – 4.75%, the eighth rate increase since March of 2022.
Depending on your investments in the stock market, you might have seen bleak or lackluster returns throughout 2022, with most investors navigating a bear market and indexes that performed almost as badly as they did during the 2008 financial crisis:
- Dow Jones Industrials: Down 8.8%
- Nasdaq composite: Down 33.1%
- S&P 500: Down 19.4%
- Russel 2000: Down 21.6%
The job market has felt equally uncertain. With tech companies making headlines for massive layoffs (including Apple, which seemed to be unscathed until less than a week ago), and smaller ones not getting as much publicity, it’s natural to feel nervous.
In the current economic environment, it makes sense if you don’t want to put your (overpriced) eggs into one basket or invest anywhere at all. You may be asking yourself, is it a good time to invest in real estate with economic uncertainty all around you?
Is it a good time to invest in real estate? It all depends on your strategy.
“Don’t wait to buy real estate. Buy real estate and wait.” – Will Rogers
Just like any kind of investing, the more you can be strategic with your money, the more you can come out on top. There’s never a right or wrong time to become a real estate investor. The more important thing is picking the right strategy based on where we’re at in the real estate cycle.
Investing in a seller’s market versus a buyer’s market
In a seller’s market, there are more buyers interested in real estate than there are available properties, which leads to bidding wars and potentially overpriced investments. In a buyer’s market, the opposite is true – properties are available in higher numbers than there are interested buyers, which means people looking to invest in the real estate market can stand to get a property for a steal.
With a seller’s market, you need to stay grounded as you compete against the crowd.
The more well-defined your goal numbers are for an investment property, the more prepared you’ll be to make an offer when the right asset comes around. Research the housing market and set goals for your occupancy rate, rental income, expected rate of return (cap rate), listing price, cash on cash return, and other pieces that will help you get a feel for your return on investment. The last thing you want to do is make rash decisions in a competitive market and wind up with a property that doesn’t align with your investment objectives.
In a buyer’s market, you need to adjust the approach but keep same fundamentals.
You may be able to buy a property at a discount. On the other hand, finance will be more difficult or more expensive. Access to the right capital is a big advantage and can make or break deals. Have plenty of cash reserves, plan to hold for a long period of time, and get the right financing to make the deal as optimal as possible.
As interest rates continue to stay high in 2023, the market will continue to be a buyer’s market for investors who are adequately prepared.
Source: @jayparsons on Twitter – RealPage and MSCI
Investing in real estate during periods of inflation
Is it a good time to invest in real estate with interest rates at their highest levels in 40 years? The Fed rate being raised to combat inflation also means mortgage rates and home prices are much higher than we’ve been used to.
With real estate investing, you’re playing the long game. No matter what type of property you’re investing in, you’re likely to hold the investment for several years. In that time, who knows how the economy will rise and fall? Because you are investing for the long-term, even if the economy falls, the hold period should be longer than any economic cycle.
For multifamily investments, it’s important to remember that lease rates tend to increase alongside inflation, allowing apartment owners to adjust their rents accordingly at the end of a yearly rental term. Even in turbulent economic times, people are looking for rental properties, sometimes leading to increased interest in multifamily properties during inflationary periods or times of recession.
Focus on investing in real estate that generates income. For example, when you buy rental properties, you can collect money from rent and services, providing a built-in hedge against inflation. Investments are also financed in today’s dollars but paid back in future dollars, making the money you put in worth less in the future in periods of average or accelerated inflation.
What happens to multifamily investments during a recession?
It’s hard to say with complete accuracy what could happen in adverse economic scenarios, but let’s follow one possibility where it might lead. If we experience a recession, that means additional layoffs. While we’ve seen a lot of recent layoffs in the knowledge sectors, a recession can also mean lost jobs on the blue-collar side. These employees, who may be more likely to rent, may end up becoming delinquent. This is likely to affect class C and Class B- properties.
For people who live in class A properties with all the amenities, a recession might mean opting for a more modest apartment, making the move from class A to A- or B+.
Both scenarios highlight the attractiveness of class A- and B+ properties. Adverse economic situations that can bring instability to class A and C properties are why Investream specifically seeks out properties in this B+ to A- range in 2023.
What happens to multifamily investments in a worst-case scenario?
Taking it a step further, if inflation stays high, the Fed continues to raise the interest rate, layoffs continue, and inflation still doesn’t get under control, positive cash flow will be affected.
This is where playing the long game comes into effect. With Investream properties, we project to hold for 5+ years, which allows us to pass just about any bad cycle and see it through to the other side. We have plenty of cash reserves in the deals we hold and operate with the belief that whatever is happening now economically will be a distant memory by the time we cash out. We take long-term, fixed loans and de-risk fluctuation and potential recession by picking more recession-resistant asset classes.
The Bottom Line: 2023 is a good time to invest in real estate, but so is any other time if you’re strategic.
Investing in real estate is a long-term game. By picking the right strategy and markets, working with the right partners, securing the right financing, and most importantly, sticking to a set plan, you can hedge your bets and have a greater likelihood of success. Focus on your tenants and community – anything within your control. If you follow these principles, investing in multifamily real estate will be a rewarding expeirence for you and your family.
If you want to learn more about why it’s always a good time to buy real estate, join our community. We offer industry highlights and data-driven multifamily investment opportunities.
