The past two years have been anything but “normal” for real estate investors, and many have learned to adapt or fear missing out.
Several factors converged to create the “perfect storm” for a competitive real estate market leading into 2022. Low interest rates made homeownership more attractive to more buyers, and the low inventory helped elevate prices. The pandemic continued to impact market in several ways, including an increase in working from home, an eviction moratorium, and a supply shortage.
So, what will 2023 look like for real estate investors?
It’s impossible to predict with pinpoint accuracy, but these top real estate investors and educators identify which trends they believe will emerge in 2023, and how to better position yourself for success.
Predictions for Real Estate Investing in 2023
Inching toward “normal”
The economy and housing market are showing signs of returning to pre-pandemic levels, according to Lee Arnold, an international speaker, trainer, author and licensed broker, and CEO of Secured Investment Corp.
“Many real estate investors and construction companies are breathing a sigh of relief and hoping that the period of multiple offers, contingency waivers, and record-high prices are finally in their rearview mirror,” he said. “The entire industry is looking forward to a normalization of the housing market in 2023. Several assumptions and market trends indicate that the ‘wild ride’ is finally slowing down.”
Those trends include:
Housing starts: According to Mortgage Bankers Association (MBA), single-family housing starts are expected to reach nearly 1.17 million in 2022 and 1.21 million in 2023.
Home prices: “Many of the buyers who were either forced out or simply sat out 2022’s breakneck housing market will be entering the 2023 market,” Arnold says. “Although they will have more inventory to choose from, it’s projected that housing prices will not drop, but simply appreciate at a slower clip in 20223”
Foreclosures: According to ATTOM Data Solutions, the third quarter of 2022 saw significant increases in foreclosures, with a 34-percent uptick over the second quarter. “Although volume is still low, foreclosures will likely continue to creep up in 2023 as more and more homeowners exit forbearance programs,” Arnold says.
Mortgage rates: The Mortgage Bankers Association predicts that rates will rise steadily during the year, averaging 3.3 percent in the first quarter and hitting 4 percent by year-end. “Because of this, originations – especially refinances – should drop significantly,” Arnold adds.
Rise in short-term rentals
Short-term rental strategies – rentals that range from a few days to several months – have been growing in popularity, and they’ll only get hotter this year, says Cincinnati-based real estate investor, author, and educator Vena Jones-Cox. Once they become familiar with the unique requirements and how they differ from long-term rentals, investors have been finding this strategy can be profitable.
“I think a lot of investors are attracted to [short-term rentals] because the rent is pre-paid, and at the end of the three, seven, or 30 days (whatever the duration may be), the tenant leaves, or you call the police to remove them,” she says. “There aren’t evictions involved.”
Master leasing and other creative structuring
The competitive market and the rise of short-term rentals as a strategy opens the door to creative strategies such as master leasing, says John Bowens, National Education Specialist at Equity Trust Company.
Through his training sessions, Bowens learns of investors employing these strategies including Candice, who performs fix-and-flips and buy-and-holds inside and outside of her IRA. She works with aging, exhausted landlords that would not give up their property, but who are willing to give up dealing with tenants and property management.
Candice recently negotiated a master lease agreement with a property owner. He maintains property ownership, and Candice handles property management and receives rent. Candice structured this agreement in her retirement account, which means any expenses and income flowfrom and back into the account.
Candice leases the property as temporary housing with a lease lasting a minimum of one month. Her expenses include furnishings, monthly rent payment to the property owner, utilities, and miscellaneous repairs. All profits flow back into the IRA. After all expenses, her operating cash flow is between $1,000-$1,200 monthly. In her first year, she made back her principal investment of approximately $20,000 and showed an $8,000 profit.
“Expect to see more of these transactions this year,” Bowens says, adding, “The strategy has been one of the most popular topics in my mastery classes and other presentations to real estate investors throughout the country.”
Vena Jones-Cox has been employing more creative investment structures in the past couple of years than any other time during her career. Some of her recent transactions include long-term lease options (lease with the option to buy at a later date) and a pure option (option without a lease).
These creative agreements have become more attractive as more buyers or sellers either don’t qualify for traditional bank funding or want to decrease their tax burden.
“The lease option structure I used will help a lot of retiring housing providers to avoid paying huge capital gains tax when they sell,” Jones-Cox says.
Self-storage opportunities continue
COVID-19 has caused conditions similar to a recession, says Scott Meyers, a self-storage developer, owner, syndicator, operator, and educator, as well as founder of Self Storage Profits, Inc. and Kingdom Storage Holdings.
During the pandemic, as unemployment soared, many households were forced to consolidate as people had no choice but to move in with family or friends. This creates a need to store their belongings.
“Self-storage has become the most recession-resistant asset class, and COVID-19, as scary and as sad as the situation has become, has benefitted this industry as the economy continues to sour,” Meyers says.
The long-term effects of the pandemic and potential recession or recession-like conditions could create additional opportunities for self-storage investors, he adds.
“Many will struggle, but now is the time to be hyper-aware of the opportunities that will come on the market due to all the challenges and fear that some owners may not want, or have, the ability to weather.”
Adapting to new technology
Across nearly all business sectors, owners and operators learned during the pandemic that they would need to quickly adapt to a new way of life – one that may be here to stay. That was no different in the self-storage business, says Meyers.
“During the pandemic, the facilities’ owners who hadn’t already invested in mobile websites that allow customers to rent a unit without human interaction, did so very quickly to meet the needs of our customers,” Meyers says. “But the self-storage industry will not likely be affected compared to other industries, as proven by market statistics so far. Be sure you make the appropriate changes that will allow you to continue to do business online, and be intentional in your approach to investing during this downturn.”
Continued supply chain disruption
Vena Jones-Cox doesn’t anticipate that the supply chain issues that plague the housing industry will disappear any time soon. Delays or shortages in building and rehab materials including lumber, siding, and windows could continue through the year.
Those who invest in rehabs may need to take a more proactive approach when supply or labor needs arise.
“Get your systems in place so you know who’s going to do your rehab and schedule it before you close on the property,” she says. “Know what materials will be available to you before you close.”
Casting a wider prospecting net
Finding the real estate investment market increasingly competitive for investors, Jones-Cox goes off-market to find opportunities. Her sole outreach method is direct mail, targeting homeowners or potential sellers whose properties aren’t listed.
Still, her off-market efforts face more competition in this crowded market, from investors and prospective homebuyers alike.
Jones-Cox is focusing her efforts on a less-crowded marketplace to find opportunities: nearby rural and small-town areas.
“The call volume is higher per capita, per postcard, than the call volume from outreach in my city,” she says. “In rural areas, people are more open to creative finance deals (such as let me make you payments, let me take over your payments). They’re more familiar with those and have experience with them.”
On the other side of the transaction, rural properties have been more profitable for Jones-Cox than in the past. One reason, she says, is increased demand. Buyers priced out of their preferred city can expand their search beyond city limits and find a similar house at a more affordable price.
Jones-Cox adds that with more of the workforce going remote, it’s no longer important for many to live close to their employer, which means more buyers are considering rural living.
Passive real estate investors return
Similar to 2004-2007, Jones-Cox notices a larger passive-investor presence at the Cincinnati Real Estate Investors Association meetings.
“People who are not interested in owning or renovating properties but want the returns were showing up to meetings saying, ‘how do I just be a money person?’” she says.
Potential of taxes or legislation on the horizon
Though nothing has been passed into law, legislators are discussing potential changes to IRA rules, as well as a hike in taxes including the capital gains tax rate. Whether or not laws change this year, real estate investors should be aware of potential changes that could affect investing or wealth building.
Depending on your situation, there are ways you can help protect yourself and maximize your investments, says Bowens. They include:
Real estate in an IRA – Using an IRA for real estate investments provides potential tax deductions and other advantages, and there are no taxes on capital gains when you invest within an IRA.
Legacy planning – Be aware of the rules regarding inherited IRAs to potentially minimize your loved ones’ tax burden when you pass away, and consider potential tax liabilities you could encounter – especially in light of the SECURE ACT, he says. Learn more in this video.
Discover how to harness the power of self-directed IRAs in your real estate investing – visit TrustETC.com for more details.
About Equity Trust
Equity Trust is a financial services company that enables individual investors to diversify investment portfolios through alternative asset classes, including real estate, tax liens, private equity, cryptocurrency, and precious metals. Our tax-advantaged, self-directed investment accounts appeal to entrepreneurial investors who want to take control of their wealth. We offer clients a robust account management system, and wealth-building education, which enables them to grow their knowledge and complete transactions with ease.
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