Cofounder and Managing Partner of Disrupt Equity. Learn more about our multifamily investment opportunities by visiting our website.
Is now a good time to invest in real estate? As the economic outlook becomes a little murkier, this question is on many investors’ minds. Many people are worried about inflation, layoffs and broader macroeconomic conditions that seem to make this an unsuitable time to get into real estate. However, despite the economic news, some investors might still be thinking about making a purchase.
As the co-founder of a multifamily real estate investment firm, here’s what I recommend keeping in mind if you’re thinking of investing right now:
Why Some Investors Might Consider Purchasing A Property
• Demand and supply dynamics: Similar to other industries, the multifamily real estate market is heavily influenced by the interplay between demand and supply. One of the main reasons for this is that the basic need for shelter makes real estate relatively recession-resilient, and with a housing shortage in the U.S., demand is strong. 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 they can adjust their consumption of other goods and services.
• Time in the market: Based on my observations, much of the hesitation to buy real estate comes from a desire to time the market. I’m seeing a number of investors who are 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’s recency bias in this perspective. The last time the Federal Reserve funds rate was above 4% (where it is 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 went much lower) because of the Great Recession. Going back further, much of the ’90s had rates exceeding 5%. Deals still happened, and a number of investors have since found success. I believe time in the market beats timing the market.
Risks Of Investing In Real Estate Right Now
Of course, 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 include:
• Economic instability: This can have a significant impact on real estate investments and lead to increased vacancy rates and decreased profits from rental income. If you are considering investing in real estate, it is essential to make sure you or your investment firm have adequate reserves in place to help withstand any dips in the market.
• Rising interest rates: High rates can have a major impact on real estate investments, as they drive up borrowing costs and make it more difficult to maintain positive returns.
Identifying Investment Opportunities In 2023
Warren Buffet is known for saying, “Be fearful when others are greedy and greedy when others are fearful.” Right now, I’m finding that many real estate investors, brokers and lenders are fearful. There are interest rate concerns and inflation woes, and all of this means that many people are staying put.
Transitioning to the long-term perspective, real estate investment is a marathon, not a sprint. No one can predict with certainty what the future of the real estate market will look like five, 10 or 30 years from now. This is why investors who are considering purchasing a property this year must ensure they are taking the right approach and conducting their due diligence. In doing so, they can identify the real estate opportunities that are right for them.
If you are a real estate investor looking to invest in today’s market, I would take the following precautions:
• Conservative underwriting: I recommend taking a conservative approach when making underwriting and rent growth projections in light of the current economic climate. While rent growth has been high in recent years, the pace is slowing, and it is important to be realistic when setting assumptions for future growth.
• Ample reserves: To help increase the security of your investments, ensure you have ample reserves when pursuing a real estate deal. This might help mitigate the impact of market and macroeconomic fluctuations.
• Securing the right debt: Investing in real estate comes with the risk of rising interest rates, so it is important to consider which measures you need to take to protect your investments. Do your research about which funding options best suit your needs, such as fixed-rate debt or interest-rate caps, for example.
Nobody knows what will happen over the next year or two. However, I believe the future outlook for real estate is bright. With a long-term perspective, real estate has the potential to provide a steady stream of passive income, though it’s still worth noting that there could be short-term fluctuations in the market. By focusing on fundamentals and taking a long-term approach, investors can ensure they’re capitalizing on the right opportunities for them in the real estate market.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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