Real estate has been a popular form of investment for decades. Whether you’re buying, owning, or managing real estate properties, you can generate income or capital appreciation, or both.
In this blog, we will explore why buying real estate in 2023 may be the right investment for you and the advantages and risks associated with it.
No matter the economic climate, real estate investments have several advantages over other forms of investment.
Although Fannie Mae expects the US housing market to still struggle in 2023, there are several good points to take note of, which contribute to a more positive outlook for the industry as a whole. Mortgages are slowly becoming more affordable for homebuyers as rates have continued a downward movement for the past few weeks. Reports also stated that home prices declined year-over-year in February, and home sales experienced the largest monthly percentage increase since July 2020.
However, real estate experts have mixed opinions on whether or not home prices will continue to drop in 2023. According to Rick Sharga, Executive Vice President of Market Intelligence at ATTOM Data, it is likely that low inventory will continue to upset the real estate industry throughout this year. This only means that the housing market will remain competitive, and homebuyers will have to work hard to buy a property.
Sharga said there “isn’t a likely scenario” where inventory would recover and reach its normal numbers in 2023. If this trend continues, it will put pressure on housing prices and will ultimately result in demand growth for rental houses.
This current scenario makes purchasing a house and converting it into a rental property a great investment. Finding a tenant will be easier this year as rental demands are expected to soar.
Recommended: Single-family rental investment strategy
Benefits of buying real estate in 2023
Appreciation of the property value
Property values appreciate due to factors such as inflation, population growth, and demand for housing in a particular location. Real estate investors can take advantage of property appreciation by buying properties at a lower price today and selling them at a higher price in the future.
As reported recently, US home prices went down for the seventh consecutive month in January. This is despite the recent easing of mortgage rates across the country. Additionally, the continuous decline in home prices makes it hard for homeowners to sell their properties at the price they want. This market creates an unusual trend for sellers to give in to their buyer’s requests, which opens the window for some to generous deals. Sellers may have a hard time declining a softer sell price given the current situation of the market.
Now, while the inflation rate has been skyrocketing in recent months, consumers finally saw a drop to 6.04% in February compared to 6.41% in January. This is still above the Federal Reserve’s target of 2.0$-2.5% and the long-term average inflation rate of 3.28%. While rising inflation rates are typically a bad sign for most Americans, the data indicates that real estate properties will continue to appreciate over time, making them still a good investment.
Conversion to rentals
Another benefit of buying real estate in 2023 is the option of converting your property into a rental home. It is a recommended move since rental demand is expected to stay strong throughout the year. The demand for rental properties is driven by factors such as population growth, changing demographic trends, and affordability issues in the housing market. As a result, rental rates have been increasing in many areas. And with high demands, chances of having a vacant property are low, projecting a stable rental income.
Your rental income can help you cover the expenses associated with owning the property, like mortgage payments, property taxes, and maintenance costs. Renting your property can also provide a steady stream of passive income for you.
Risks and challenges of buying real estate
While real estate investments can provide many benefits, there are also several risks and challenges that investors need to be aware of. These include the following.
1. Market risk
The real estate market can be unpredictable, and property values can fluctuate due to changes in the economy, interest rates, and other factors.
2. Property risk
Properties can be damaged, destroyed, or devalued due to natural disasters or environmental factors, especially as we experience more extreme weather patterns.
3. Financing risk
Real estate investments typically require a significant amount of capital, and investors may face challenges in securing financing or managing their debt.
4. Management risk
Real estate investments require ongoing management and maintenance. Investors may face challenges in finding reliable tenants, managing their properties, and dealing with unexpected expenses.
Strategies to reduce the risks and overcome the challenges
There are several strategies that investors can use to mitigate the risks and overcome the challenges associated with real estate investments.
Conduct thorough research
Investors should research their local real estate market and the specific property they are considering to understand the potential risks and challenges.
Location, economy, demographics, and target market are just some of the important factors to consider. It is helpful to look for properties similar to the home in prospect and see whether or not there is demand in your area. These will help you make an informed decision about what type of rental property you should buy and where to plant your investment.
Diversify your portfolio
Investors can mitigate their risk by diversifying their real estate portfolio across different locations and types of properties. For example, apartment and condo units might be in demand in urban areas near colleges and universities. But if your target market is families, you should consider single-family homes or other spacious properties like townhouses.
By using your thoroughly researched data, you can identify the most suitable properties in your target location. To help you start, some of the best websites to start gathering information are Zillow, Redfin, and Apartment List. These will help you compare prices of similar properties for correct pricing and see which ones are more in demand in a particular location.
Hire a property manager
A professional property manager can help you manage your properties in more ways than one. From dealing with tenant issues to maintaining your property, all of these are covered by a reliable property manager. However, be sure to look for a company that has reasonable pricing and great services to offer. Ensure that you’re receiving optimal value for the money you’re spending.
Staying informed
Investors should stay informed about changes in the real estate market and the economy and be prepared to adjust their investment strategy as needed to mitigate risks and take advantage of opportunities.
