What's real estate investing going to be in 2023? Find out here! You'll discover where the biggest investing opportunities will be as well as important real estate insights that you may not have considered. Plus, you'll get a simple but powerful market analysis so you will know what to expect when investing in real estate in 2023.
Real Estate Market Analysis
2022 was a tumultuous year for the housing market in the United States. Prices began to skyrocket as we entered the new year and they climbed and climbed. Then about the end of May, early June, there was an abrupt change. Prices began to fall in some markets, although they didn't come down to where they started in January. In other markets that decline wasn’t as steep, and in some markets prices actually continued to climb ever so slightly. However, as we went through summer and then into fall, most markets began to level off.
What caused the abrupt shift in late spring, early summer? Well, mortgage interest rates nearly doubled in a very short time and that hike in interest rates caused buyers to move quickly, buy a home and lock in the lowest rate they could. Once we get to May and early June, all those transactions have cleared out, and that's where the abrupt change comes from. What’s interesting about the market trend is that as the interest rate climbed to a high of 7% in early November, the market began to leveled off. Why did that happen? There were a lot of experts predicting that the real estate market was going to totally collapse, but it didn’t. Why not? The answer is quite simple; low inventory level.
Even though inventory levels increased a little and then leveled off, they're still extremely low. In residential real estate, the primary driver of demand is people looking for a home to live in. People are always buying houses regardless of the macroeconomic conditions and interest rates. If inventory levels are high, buyers have a lot of options and therefore they can negotiate with sellers. The sellers will either drop their price or provide other incentives. But if inventory levels remain low, buyers don't have the upper hand in negotiations and sellers can stick to their price. And that's why even though the interest rates have continued to climb, the market has leveled off. Low inventory is the anchor that keeps real estate markets strong and that's why in 2023 they will remain strong.
Why Are Inventory Levels Low?
Homeowners aren’t selling - If homeowners that bought properties five, ten, or even three years ago were to sell now they would reap huge profits, despite the price dip in the market. But the reason why homeowners aren’t cashing in is because if they do sell, what are they going to buy? Inventory is low, prices are high, and interests rates are double. So a lot of homeowners are staying put and not selling. And with the markets leveling off, and in some cases climbing back up a bit, you can expect this trend to continue.
Builders aren’t building to keep up with demand - This has been the trend in new builds for years. It's just exacerbated right now because material costs have skyrocketed, land costs are still high, and it’s difficult to find quality, affordable labor. And with interest rates up it costs more to borrow for their projects and it's harder for them to sell their properties at the price they need to make a profit. However, one of the biggest hurdles for builders is government red tape. It is dang near impossible to build a new subdivision these days due to local governments and long-term residents that file lawsuits.
These two factors are important because right now low inventory levels are keeping the real estate market solid. When you bring all this together, what you see is even though interest rates have climbed and prices did drop in some markets, as we go into 2023 inventory levels will remain incredibly low. There may be a few variables and fluctuations in some markets, but overall low inventory will be the anchor that stabilizes the market. This market analysis will help us better understand where the opportunities are in real estate investing in 2023.
Real Estate Investing in 2023
2023 is going to be a creative residential investors dream. Creative real estate investing is when you purchase properties off market directly from the seller, which allows you to structure non-conventional financing. These creative financing options are: subject to or owner financing, land contracts, and lease options. If you would like an in-depth teaching on creative financing, I have a video called Creative Financing Comparison where you can learn more.
Creative financing also enables investors to buy properties with no money down or with poor credit. That's how people like me, living out of my truck homeless 20 years ago, became financially free. This concept of creative real estate investing is ideal in the environment that we're entering in 2023. Here are 5 reasons why 2023 will be a creative real estate investors dream:
1 - Price Prediction Confidence
Because 2023 is going to be a calm, cool and collected market, we can be confident in our predictions of what a property will sell for based on the most recent comps. I have an amazing video on predicting final sales price and it talks about the importance of the skill of determining what a property will sell for when you put it on the market, whether as is or fixed up. This is the skill that makes or breaks a real estate investor's career.
Predicting Final Sales Price: Investors often refer to the “as is value” or “after repaired value”, but that's not the right focus. Value relates to an appraisal. Although that information is important, it doesn't make or break you. What can make or break you is what the property sells for. So as an investor you need to predict what the property will sell for. Otherwise you can't negotiate with the seller correctly.
When we have a fluctuating market like 2022, it becomes more difficult to predict the final sales price. If you bought the property in January or February and put it on the market in April, you weren't complaining because housing prices shot up. But if you bought the property in May or June and then you try to sell it in September you lost money. So it's much easier to predict the final sales price in a stable market because you can be confident in your predictions. And if you're structuring creative financing, it plays a key role as well because sometimes you're deals have thinner margins. So, confidence in final sales price prediction is going to be awesome in 2023, and that's the dream of a creative real estate investor.
2 - Subject To Low Interest Rate Loans
Most sellers are not selling a property that they just acquired three or six months ago. Usually, they've owned it for one to seven years which means they have lower interest rate loans than the interest rates today. And since subject to is a key strategy for creative investors, you will be able to take subject to low interest rate loans, even though the rental rates are higher, and prices are still high. We've already been doing this for several months now, and it's just fantastic.
There are situations where unfortunately, someone's passed away and the interest rate was 3%, and we can take that over subject to. That doesn't affect anybody because the borrower's passed, and it's literally half of what the rates are right now. So that’s another dream of creative real estate investors. I've never been an investor in an environment before where I can take over loans subject to that are literally half of the prevailing rates.
3 - Rent to Own Boom
Rent-to-own opportunities abound as well. Rental rates are strong because it’s a lot harder to get a loan right now. And prices are up, so down payment requirements are more. A lot of people want to become a homeowner but simply can't because they don’t have a large enough down payment. Now you can provide that opportunity. If you put a property on the market as a rent-to-own, it's like piranha's attacking raw flesh because so many people want this. And because you can take over loans subject to at ultra-low interest rates, this combo right here has never been better. It's an absolute dream for a creative investor.
4 - Less Competition
There's less competition in the marketplace. Less competition because the grifters, the people that just came into the market because the prices were going up in 2020 – 2022, got flushed out in the second half of 2022. But also because the iBuyers are struggling. Redfin disappeared and Opendoor and Offerpad are on life support. We're also seeing that the cost of marketing for sellers has dropped dramatically, and that is also evidence of the less competition. So we love this too. Less competition is exactly what we want as a creative real estate investor.
5 - Steady Deal Flow
Some have asked me, "But wait a minute, Phil. If the inventory levels are remaining low, aren't they low for creative real estate investors like you?" Good question. Well, it turns out that our business of reaching sellers directly remains consistent. We have had steady deal flow year after year because we're dealing with the 1 to 2% of sellers in any marketplace that need to sell for a personal reason that has nothing to do with macroeconomic changes or interest rates. It has everything to do with the fact that they need to sell; perhaps someone's passed away or is sick, it could be financial issues, or maybe it's been a long-term rental that has fallen into disrepair. This is why our deal flow remains consistent and isn’t impacted by fluctuations in inventory.
Another Tough Year for Traditional Investors
Creative residential real estate investors will be living the dream in 2023, but it will be another tough year for traditional investors.
High Prices - Unfortunately, they have high market prices to deal with.
High Interest Rates – Due to climbing interest rates it costs more to borrow money (traditional investors have to close on a property, and then they fix it up and resell it).
Low Inventory - Low inventory levels only make it more difficult. I feel the pain of this too when I'm buying vacation rentals using traditional methods. Sometimes the best deals you can do are the ones on the market because they have all the characteristics you need in order to maximize your revenue. I was hoping that vacation rental markets would come down more than they have. So for now I'm stuck with searching for something that hits the MLS or an agent tells me about that's a home run and jumping on it within an hour. So I might still pick up one or two of those this year, but really and truly, this is going to be another tough year for me to find any good vacation rentals.
Low Foreclosure Rates - There's one more aspect that adds insult to injury for traditional investors, which is low foreclosure rates. They were predicting that after the moratorium had expired foreclosure rates were going to go up. That hasn’t happened. Right now, foreclosure rates are still lower than they were pre-pandemic. So, low foreclosure rates are also tough for traditional investors because typical inventory sources like auctions or bank owned properties aren’t as readily available. We're at historic lows on foreclosure rates. So it's tough times for traditional investors.
Commercial Investing in 2023: Multi-Family and Mobile Home Parks
Multi-family and mobile home parks will remain strong in 2023. And banks are feeling confident about these investments as well. Right now, if you apply for an apartment loan and have good credit, assets, experience, and it's a well-performing asset, the interest rate on that apartment loan is lower than a primary residence loan. This is unprecedented. The fundamental rule in loans is the best of the best interest rate comes from a primary residence home because it typically has less risk. Investment property is viewed as riskier because you don't live there.
But traditional lenders are seeing apartments as a solid investment because a lot of would-be home buyers are having to rent. And there's just not enough building of the Class B and Class C apartments. There are record numbers of Class A apartments being built, but Class B and Class C is where all the big returns are. With limited inventory, creative investors have great opportunities, and so this market will remain strong in 2023.
This is more commercial real estate and is for those investors with more money – $50 to $500,000 to invest. If you're looking to get into a position where you have a lot of money to invest, then residential creative real estate investing can get you there. Once you have more money, you can invest in multi-family and mobile home parks. If you would like to learn more about commercial real estate investing, I recommend Commercial Property Advisors with Peter Harris.
Make investing in 2023 your best year ever with the help of a mentoring team. Apply to be my next apprentice here: https://www.freedommentor.com/apprentice/