Is 2023 & 2024 a good time to invest in real estate?
As the economic outlook remains volatile, this question is on many investors’ minds. Many are worried about inflation, layoffs and broader macroeconomic conditions that seem to make this an unfavorable time to get into real estate. However, despite the economic news, there are investors that are still considering purchasing homes and commercial investments.
As an investor and founder of a multifamily real estate investment firm, here’s what we recommend if you’re considering investing right now:
1. Supply & Demand dynamics: As with alternate industries, the multifamily market is heavily influenced by the interplay between supply & demand. The main reasons for this is that the basic need for shelter makes real estate relatively recession-resilient, and with a significant housing shortage still prevalent in the U.S., demand remains strong. Even while economic conditions remain challenging, Americans still need a place to live, as they cannot adjust their housing needs as they can adjust consumption of retail goods and services.
2. Time in the market: Based on our observations, much of the hesitation to buy real estate is derived from a desire to time the market. We’re seeing a number of investors who sat on the sidelines two years ago when interest rates were super low, now feel the current rates appear to be too large a barrier to invest now. However, there is a level of ‘recency bias’ from their perspective. The last time the Federal Reserve funds rate was above 4% (as at the time of this writing) was in 2007, according to Forbes. That wasn’t when it crossed 4%, though. The Fed had to reduce it to 4% (and eventually dipped lower) because of the Great Recession. Prior to that time period, much of the ’90s had rates exceeding 5%. Deals were still being closed and a number of investors have since found success. However, in the end – time in the market beats timing the market.
Risks Of Investing In Real Estate Right Now
Even Captain Obvious knows at the end of the day that there are risks involved when investing in real estate, and it’s important to be aware of them in today’s economy. The primary risks are:
a. Economic instability: This issue can have a significant impact on real estate investments and lead to increased vacancy rates and decreased profits from rental income. If you’re considering investing today it is essential to make verify your investment partners/syndicate or firm have adequate reserves in place to help withstand any dips in the market.
b. Rising interest rates: Even though rates were far higher 15-years ago, today’s rates can have a major impact on real estate investments based on trailing investment formulas and legacy rate investment projections, as they drive up borrowing costs and create difficulties in maintaining consistent and positive returns.
Where We See Investment Opportunities In 2023 & 2024
Warren Buffet once said “Be fearful when others are greedy and greedy when others are fearful.” Right now, We’re finding many real estate investors, brokers and lenders are fearful due to the unknown economic, global conflict, environmental concerns and pending changes in taxation and materials expense. There are interest rate concerns and perceived/real inflation woes, and these combined factors mean that many buyers and investors remain on the sidelines and/or are staying put.
So, what is the long-term perspective based on real estate investment traditionally being a marathon, not a sprint? We don’t have a crystal ball and nor do you, and we can’t predict with certainty what the future of the real estate market will look like 5, 10 or 20 years from now. This is why investors who are considering purchasing a property this year must verify they’re taking the right approach and doing their due diligence. There’s $1.5T in commercial loans coming due over the next 18-months, and residential housing metrics are all over the place, depending on the market you’re considering. In doing proper diligence, they can identify the real estate opportunities that are prudent, sensible and right for their needs and investment returns.
For the real estate investors seeking investments in today’s market, we recommend the following preparations and contingencies:
1. Conservative underwriting: Take a conservative approach when calculating underwriting and rent growth projections in light of current economic conditions and climate. Though rents have increased in recent years, the pace is slowing, and it is important to be realistic when creating your assumptions for future growth.
2. Set aside ample cash reserves: To increase the security of your investments, secure ample reserves when pursuing a real estate deal. This will help to mitigate the impact of market, global and local socioeconomic and macroeconomic conditions and fluctuations.
3. Securing ideal debt instruments: Investing in residential or commercial real estate holds the risk of rising interest rates, so it is important to consider which measures you need to take to protect your investments and to prepare for future rates when your financing comes due as we’re seeing now. Research the funding options that best suits your needs, such as fixed-rate debt or interest-rate caps – and make use of 1031 tax savings and noncommercial investor financing.
What will happen over the next year or two is a mystery, but most successful investors make exceptional returns during these times…see Warren Buffet’s comment above. Though we believe the future outlook for real estate is going to remain robust even with its ups and downs over the next two years. Our long-term perspective is that both residential and commercial real estate will continue to provide a steady stream of passive income, though it’s still worth noting that there will continue to be short-term fluctuations and blips in the market based on microeconomic conditions and regions. Focusing on fundamentals however and taking a long-term approach will allow investors to ensure to capitalize on the significant opportunities that will come about as some are/will be prepared and will remain agile and informed in the real estate market, while others won’t be aware or focused to see the wave coming at them.
**The information provided by Nouveau is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
**Contributor – Forbes & Motley Fool – https://www.fool.com/…/commercial-real-estate…/
*Call us at 727.304.3320 or email Nouveau Enterprises TODAY at nouveauenterprisesllc@gmail.com for a FREE consultation and more information about our services!