As investors turn the calendar to a new year, they reflect on past performance, look at new possibilities, and create a plan to navigate the real estate market. After significant appreciation in 2021 and the first half of 2022, real estate has slowed down due to rising interest rates, stubbornly high inflation, and layoffs, among other factors. The challenges real estate investors experienced on the backend of 2022 don’t appear to be going away anytime soon. However, many investors have heard the phrase, “be greedy when others are fearful.” Where does this leave investors who love real estate but don’t like the current market conditions? Here are a few things to keep in mind when planning your real estate investment strategy for 2023.

Real estate prices have rebounded from recessions and depressions in the past, and people will always need places to live.

High Interest Rates Will Stick Around

The Fed aggressively raised interest rates in 2022 to combat inflation. Although the Fed has indicated a more moderate approach in 2023, interest rate hikes are still on the table. The Fed may use 25-50 basis point hikes instead of the 75 basis point hikes that dominated 2022. 

Higher interest rates lower housing prices because homeowners won’t be able to afford elevated mortgage payments. Buyers will have to take out less financing to purchase homes, and sellers may have to accommodate with lower prices. 

Layoffs Loom Over the Economy

Real estate wasn’t the only asset that overextended itself during the pandemic. Many corporations hired more people to address rising demand. With demand waning and more people getting protective due to inflation, layoffs have been steadily increasing for many corporations. Rapidly decelerating revenue and earnings growth in 2022 suggests the possibility of negative year-over-year declines for many corporations’ revenue and earnings. This would imply more layoffs and result in fewer available buyers. Even with these layoffs, inflation remains high. It’s been slowing down recently, but inflation is still up far more than the Fed’s 2% target. 

Investors may benefit from staying on the sidelines for the first half of the year and monitoring the markets.

Rental Properties Still Get Cash Flow

Real estate has survived various economic cycles. The limited supply of housing props up the asset during inflation, and real estate remains a great investment. However, it makes sense to aggressively acquire new properties in some cases and to hold assets or sit on the sidelines in other economic cycles. Real estate investors with more time to wait can continue collecting rent. As long as rental income exceeds property expenses, you can hold onto the property and build equity each year in a scalable way. 

Real estate prices have rebounded from recessions and depressions in the past, and people will always need places to live. Rent has stabilized in recent months. Fewer investors may have the opportunity to raise rent by double digits like they could in 2021 and the first half of 2022, but stable rental income can still cover the mortgage and other costs. Panic selling isn’t the right choice, but investors should understand that things may get worse before they get better. Locations with booming population growth and other favorable trends can better navigate the uncertainty. 

Now May Not be the Best Time to Flip Properties

Rental property investors have more time to wait for markets to recover after a downturn, but flippers do not have the same luxury. Many house flippers take out loans with low upfront monthly payments and race against the clock to make renovations, market the property, and come to an agreement with a buyer. The catalysts for 2H 2022 slowdown remain present, and some of them can get worse in the months ahead. Flippers still face higher prices for materials and corresponding supply issues. Flippers may feel desperate to sell properties at lower prices after their loans transition from interest-only payments to repaying the principal. 

It’s easy to feel discouraged about investing in 2023, but investors should keep the long-term perspective in mind.

Should You Buy Now or Wait?

Each year provides a different environment for real estate investors. Individuals must consider the pros and cons before buying properties, but current market conditions suggest an uphill battle is ahead. A weakened consumer and a Federal Reserve committed to raising interest rates do not bode well for real estate investors. 

It’s challenging to see a scenario where real estate prices shoot up in the first half of 2023. The 2H 2022 downtrend did not seem like a short-term event since the foundational issues remain and will continue to grow in the months ahead. Investors may benefit from staying on the sidelines for the first half of the year and monitoring the markets. Housing prices have been falling, and landlords have had recent difficulty with raising rent prices. 

Buying properties with high leverage made more sense when the real estate market benefitted from record-low interest rates. With interest rates on 30-year fixed mortgages exceeding 7%, it makes more sense to accumulate cash. You can park the funds in a short-term CD or FDIC-insured online bank with a high interest rate. Growing your cash, a little bit is better than having no growth at all, and keeping liquid funds on the sidelines will help you pounce on great deals.

Rising inflation, interest rates, and unemployment can create a perfect storm for investors. Fewer buyers will look for properties, and more renters will stay put or downsize. Downward pressure on property prices can create compelling buying opportunities in late 2023 and early 2024. Investors with large cash reserves can make higher down payments to protect themselves from high interest rates.

Know What You Want

The best real estate investors have entry prices and exit plans. Most investors do not set exit prices during bull markets and never enter near the bottom of bear markets because they do not establish entry prices. It’s easy to feel discouraged about investing in 2023, but investors should keep the long-term perspective in mind. That does not mean you should rush to buy overvalued real estate, but you should determine which parameters matter to you as an investor. Now is the opportunity to determine entry prices so that you can capitalize on a correction and buy properties at discounts.

The switch to remote has demonstrated the fragility of office spaces, but people will always need places to live. Duplexes, triplexes, and other multi-family properties will always hold intrinsic value. Knowing what assets you want and the price you’ll commit to for a certain number of units or square feet in a specific neighborhood will strengthen your investing strategy for 2023 and beyond.