After two disruptive years in the real estate market, we are all eagerly looking forward to 2023 and hoping that it will bring some much-needed respite and calmness. The good news is that experts generally agree that next year will witness a shift from the red-hot seller's market to a more neutral one. This means that property prices and mortgage rates will stop climbing at their currently steep rates.
Nonetheless, those who wish to find profitable investment opportunities in 2023 will still need to deal with the consequences of 2020-2022 trends. Specifically, home values and mortgage interest rates will remain relatively high, and regional shifts will continue.
Here are four easy steps that investors can take now to prepare for investing in real estate next year.
1. Get your finances in order
The first step in real estate investing is always to figure out your finances. You should check out your current savings, income and expenses and consider how you expect them to change over the course of the next few years. Next, use your current financial situation as the basis for estimating how much money you can spend on an investment property. Your budgeting should include the down payment and other closing costs on one hand, as well as monthly mortgage payments and recurring costs on the other.
While budgeting is always important, it is absolutely crucial at the current moment and moving into 2023. With annual inflation standing at 7.7% as of publication (after reaching 9.1% in June), knowing how much you can afford to spend on a property while factoring in various unexpected events is a must.
After all, it doesn't make sense to invest in a property now only to find yourself in foreclosure a few years down the road.
2. Find affordable financing options
The way you finance the purchase of your investment property is a major determinant of its sustainability and profitability. That's why if you're planning to invest in real estate in 2023, now is the time to start looking for available financing opportunities.
Conventional mortgages are becoming significantly more expensive. The 30-year fixed mortgage rate is equivalent to 6.49% as of publication at the moment, which is the highest it has been since April 2002. In addition, there has been an appreciation of 41% in residential property prices since the onset of the pandemic in March 2020. Therefore, investors need to look into alternative financing options as mortgage rates are simply too high.
Some options to explore include hard money loans, private money lenders, crowdfunding, syndication and partnerships. The rise of proptech (property tech) platforms offering financial solutions to real estate investors can definitely make the process easier and more understandable — even for beginners.
3. Be on the lookout for the best markets
The real estate market has always been highly regional, and the pandemic further highlighted this reality. Primary markets had very different experiences from secondary and tertiary markets. In terms of long-term rentals and homeownership, many of the big city markets cooled down as residents fled to smaller towns and cities with lower infection rates, less strict lockdown policies and more affordable real estate prices. The switch to working from home further facilitates this geographical trend. Similarly, short-term rental guests stayed away from major cities and gravitated toward rural surroundings.
These trends are expected to reverse in 2023, as 9 out of 10 U.S. companies will require employees to at least partially return to the office. From an investor's point of view, this translates to an increase in rental demand as many of the large markets where companies tend to be located have unaffordably high home prices. In the same way, the demand for Airbnb-style properties in major cities will go back up amid disappearing travel restrictions and the decreased risk of Covid-19.
So whether you are interested in short-term or long-term rental property investments, you need to keep an eye out for regional shifts and be actively searching for the best markets to carry out your strategy.
4. Add real estate tools to your arsenal
The one trend that's clearly defined the real estate space over the past two decades has been the pervasive spread of technology in all aspects of the business. Proptech, the intersection of real estate and technology, is currently valued at $18.2 billion despite its relatively short history so far. While technology is changing the way real estate agents, brokers and property managers conduct business, the impacts for investors have been even more significant.
Tech-based apps have enhanced investment property search and analysis through the use of big data and AI. They have also boosted partial investment opportunities through tokenization and even allowed the entry of small-scale investors into commercial real estate through crowdfunding.
So regardless of your preferred investment method, it's crucial to access the best tools for investors to remain competitive in this tight market.
In conclusion, we can expect the 2023 real estate market to stay challenging. However, investors can be better prepared to navigate these obstacles and make profitable investment decisions with these four steps.
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