Co-founder and Managing Partner of Disrupt Equity. Learn more about our multi-family investment opportunities by visiting our website.
Is now a good time to invest in real estate? Now that the economic outlook is becoming somewhat cloudier, this question is on the minds of many investors. Many people are concerned about inflation, layoffs and broader macroeconomic conditions that make this seem like an inopportune time to get into real estate. However, despite the economic news, some investors are still thinking about making a purchase.
As a co-founder of a multi-family real estate investment firm, I recommend that you keep the following in mind if you are considering investing right now:
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Why some investors might consider buying a home
• Demand and supply dynamics: As in other sectors, the multi-family real estate market is strongly influenced by the interplay between supply and demand. One of the main reasons for this is that the basic need for shelter makes real estate relatively recession-proof and with a housing shortage demand is high in the US. Even when economic conditions are challenging, people will always need a place to live as they cannot adjust their housing needs in the same way as their consumption of other goods and services.
• Time in market: Based on my observations, much of the hesitation to buy real estate stems from a desire to time the market. I see some investors pining for a year or two ago when interest rates were super low, and as such, current rates now look terrifying. However, I believe there is recency bias in this perspective. The last time the Federal Reserve interest rate was above 4% (where it is at the time of writing) was in 2007, according to businessroundups.org. However, that wasn’t when it crossed the 4% mark. The Fed had to cut it to 4% (and eventually went much lower) because of the Great Recession. Going back further, much of the ’90s had rates above 5%. Deals continued to take place and a number of investors have since found success. I believe time in the market is more important than timing the market.
Risks of investing in real estate right now
Of course, there are risks associated with investing in real estate, and it’s important to be aware of them in today’s economy. The main risks include:
• Economic instability: This can have a significant impact on real estate investment and lead to higher vacancy rates and lower rental income gains. If you are considering investing in real estate, it is essential to ensure that you or your investment firm have sufficient reserves to absorb any dips in the market.
• Rising interest: High rates can have a major impact on real estate investments because they drive up borrowing costs and make it more difficult to maintain positive returns.
Identify investment opportunities in 2023
Warren Buffet does known to say, “Be afraid when others are greedy and greedy when others are afraid.” At the moment I notice that many real estate investors, brokers and lenders are afraid. There are interest rate concerns and inflationary concerns, all of which means that many people are staying put.
Transition to the Long-Term Perspective: Real estate investing is a marathon, not a sprint. No one can predict with certainty what the future of the real estate market will look like in five, ten or thirty years. This is why investors considering buying a property this year should make sure they take the right approach and do their due diligence. This allows them to identify the real estate opportunities that suit them.
If you are a real estate investor looking to invest in the current market, I would take the following precautions:
• Conservative Acceptance: I recommend taking a conservative approach to underwriting and rental growth projections in light of the current economic climate. Although rental growth has been high in recent years, the the pace slows downand it is important to be realistic when making assumptions for future growth.
• Ample reserves: To increase the safety of your investments, make sure you have sufficient reserves when pursuing a real estate deal. This can help mitigate the impact of market and macroeconomic fluctuations.
• Securing the right debt: Investing in real estate carries the risk of rising interest rates, so it’s important to consider what steps you need to take to protect your investments. Do research into which financing options suit you best, such as a fixed-interest debt or an interest ceiling.
No one knows what will happen in the next two years. However, I believe the outlook for real estate is good. With a long-term perspective, real estate has the potential to provide a steady stream of passive income, although it’s still worth noting that there can be short-term fluctuations in the market. By focusing on fundamentals and taking a long-term approach, investors can ensure they are taking advantage of the right opportunities for them in the real estate market.
The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation.