What the hell is going on with the real estate market of 2023? From high interest rates and high purchase prices to elusive cash flows, this market includes enough uncertainty to scare new and first-time investors into thinking that the best course of action might be to not participate. at this cycle.
Pro Tip: Don’t sit down.
You know the old adage:
When is the best time to plant a tree?
“20 years ago.”
When is the second best time to plant a tree?
Many expert investors will call this truth in 2023 when it comes to real estate. Sure, this year has forced us to be more conservative and strategic than we’ve been in the past, but most say you’re still better ‘in’ than ‘out’.
We spoke to two experienced investment teams, Ali and Josh Lupo (aka theFIcouple), who invest in the Albany, New York area, and Megan Ahern (aka the tatty investor), who is investing in the Lincoln, Nebraska area with her husband Jeff, to understand the current market and get advice on how to make decisions in 2023. They agree those are the two constants so far this year.
- Interest rates and house prices remain high: “The two biggest challenges are that interest rates have risen dramatically over the last 12 to 24 months,” says Josh Lupo, “and people think there’s a magical inverse relationship between interest rates. interest and prices and that prices should naturally fall when interest rates are high.” But that’s just not what we’re seeing, he says.
- Inventory is low: “Something like 50% of houses are currently paid off or have a mortgage rate below 4% currently. People don’t want to sell and take out a mortgage at 6%,” Lupo adds. construction also remain very high, so few people do it.
Five tips to guide you through the rapids
1. Don’t be scared, just understand
“If you’re sitting there waiting for the perfect market conditions, guess what. They don’t exist,” says Megan Ahern. “If you think of any time in history, there is something difficult about this market. Either you can’t get good funding like now, or you can’t get good deals because it’s 2020 and everything is over 40,000 applications. You just have to figure out how to invest with this problem in place.
2. Play the long game
Ahern and the Lupos agree that in 2023 you shouldn’t focus on generating a ton of cash flow in the first year. Instead, think about a 5-year horizon, says Ahern. “If I can get the deal to work at 7% or 7.5% or whatever right now, I’m still going to buy it. Because I can see that in five years, in 10 years, with inflation as it is, it will be worth more than today. Rents will be higher than today. And if it can depreciate on 7.5%, I’m still going to buy it. Ahern is aiming for $200 per month/door for minimum cash flow this year.
The Lupos agree: “We’re not thinking about 2023 as much. We’re looking at 2043,” says Josh Lupo. “We always buy on the fundamentals and don’t really change much in terms of the criteria – a bad deal can really hurt you. We still only buy within 5 miles of our location, we know our buy box and we know what our cash flow goal is.
3. But keep the project horizon short
“This year, I wouldn’t commit to a longer-term project,” says Ahern. “I wouldn’t start developing now because you have a year to build. I want to go in and out in a few months. I know I could see any type of market correction or crash happening in a few months, but I don’t know what will happen in a year.
4. Consider seller financing to circumvent high interest rates
Lupos only focus on out-of-market deals they find through organic networks, services like Propstream and DealMachine, and by talking directly to landlords. They find they’re working with a disproportionate number of baby boomers this year because “those properties are owned by people who have little or no debt at this point,” says Lupo. “It allows us to structure deals in a creative way where we and the seller can find a mutually beneficial arrangement. This means that instead of paying 7-8% interest on a property, we can arrange seller financing by paying 6% interest and paying 5%.
5. Be very careful with the subscription
This is not the year to fudge your numbers or get them closer to what you would like them to be. “You hear these horror stories,” says Josh Lupo, “but if you really dig, you start to unearth all the false assumptions people are making in their underwriting. The numbers never lie and there are so many unpredictable variables. The thing I have control over is the deal.
In this market, Ahern has also become more conservative in its underwriting and has not kept three months of expenses plus a 30% investment/vacation/repair fund at all times. “I keep enough cash on hand to weather any storm,” Ahern says. “As long as you leave, okay, even if we have to accept less rent, can we still keep this property, even if it wasn’t fully cashed in or we didn’t have enough money to cover the vacation or anything?
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Note by BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.