After all, what is going on in the real estate market in 2023? From high interest rates and high purchase prices to elusive cash flow, this market includes enough uncertainty to scare new and beginning investors into thinking that the best course of action may be to stay out of the cycle.
Pro tip: Don’t sit outside.
You know the old saying:
When is the best time to plant trees?
“20 years ago.”
When is the second best time to plant trees?
“Today.”
Many expert investors regarding real estate will say this to be true in 2023. Sure, this year has forced us to be more conservative and strategic than in the past, but most would say you’re still in a better position “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 Tatty Investors), who invests with her husband Jeff in the Lincoln, Nebraska area to understand the current market and get some advice on how to make decisions in 2023. They agree that these have been the two constants so far this year.
- Interest rates and home prices remain high: “The two biggest challenges are that interest rates have risen dramatically over the last 12-24 months,” says Josh Lupo, “and people think there’s a magical inverse relationship between interest rates and price. Naturally there should be a decrease. The rates are high.” But that’s not what we’re seeing, he says.
- Inventory is low: “Nearly 50% of homes are currently either paid off or have mortgage rates below 4% now. People don’t want to sell and go into a 6% mortgage,” Lupo says. This means that no one is moving. The cost of manufacturing is also really expensive, so very few people are doing it.
Five Tips to Guide You Through the Rapids
1. don’t be afraid just figure it out
“If you are sitting there waiting for ideal market conditions, guess what. They don’t exist,” says Megan Ahern. “If you think about any moment in history, there’s something challenging about that market. Either you can’t get good financing like now, or you can’t get good deals because it’s 2020, and everything is going 40k over asking. You just have to figure out how to invest with that issue.
2. play the long game
Both Ahern and Lupos agree that in 2023, you shouldn’t be focused on generating a ton of cash flow in the first year. Instead, think about a 5-year horizon, says Ahern. “If I can get this deal done at 7% or 7.5% or whatever we’re doing now, I’m still going to buy it. Because I can see that, like, five years from now, 10 years from now, with the way inflation is going, it’s going to be worth more than it is today. Rent will be higher than today. And if it can pay for itself at 7.5%, I’m still going to buy it. Ahern is aiming for $200 a month for minimum cash flow this year.
The Lupos agree, “We’re not thinking too much about 2023. We’re thinking about 2043,” says Josh Lupo. “We are still buying on fundamentals and not really changing much in terms of our criteria – a bad deal can really hurt you. We still shop within a 5-mile radius of our location, we know our buy box, and we know what our cash flow goals are.
3. But keep your project scope small
“This year, I won’t be involved in anything that is a long-term project,” says Ahern. “I wouldn’t start development now because you have a year to build. I want to move in and move out in a few months. I know that I will be able to see any kind of correction or fall in the market in a few months, but I do not know what is going to happen a year from now.
4. Consider seller financing to avoid high interest rates.
The Lupos focus only on off-market deals they find through organic networking, services like PropStream and DealMachine, and by talking directly to the owners. They’re finding they’re dealing with a disproportionate number of baby boomers this year because “these properties are owned by people who have little or no debt at the moment,” Lupo says. “This allows us to structure deals in a creative way where we and the seller can find mutually beneficial arrangements. This means that instead of paying 7-8% interest on a property, we can arrange seller financing by paying 6% interest and adding 5%.
5. Be very conservative with underwriting
This is not the year to fudge your figures or get them up to the level you want. Josh Lupo says, “You hear those horror stories, but if you really delve deeper, you start to uncover all the misconceptions people are making in their underwriting. The numbers never lie.” She doesn’t speak up, and there are a lot of unexpected changes. The only thing I have control over is the deal.”
In this market, Ahern has also become more conservative in its underwriting and defaults to keeping 30% of the capex/vacancy/repair fund at all times, along with three months’ worth of expenses. “I keep enough cash to weather any storm,” says Ahern. “As long as you say, well, even if we have to accept the lower rent, can we still keep this property? Can, even if it’s not completely cash flow or we have enough cash to cover vacancies or whatever?
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Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
