A new year is here, bringing changes we have not seen for decades. Interest rates are at nearly a two-decade high, and the seller’s market appears to be waning. Is buying a rental property a good idea in 2023? I have invested in single-family rentals for over 15 years and have seen many market trends. As a beginner, I made it through the real estate crash of 2008 and past the market cycles since then. I know if it’s a good idea to buy a rental property in 2023.
Buying a rental property in 2023 is an excellent idea if you are disciplined and stick to the numbers. When the numbers work, you should buy the property, and 2023 will likely offer more properties with numbers that work.
The real estate market in 2023 is shaping up to be very different than the last few years. In this article, I’ll give an overview of the market changes and explain why this is not the year to sit out. I will explain how the market will affect your current properties and how it may lead to even more profitable deals than in years past.
Real Estate Market in 2023
In the preceding years, home values have increased dramatically. In 2022, home selling prices rose an average of 10.1%. This rate is nearly double the 28-year average of 6% cited in the research paper, Rental Yields and HPA: The Returns to Single Family Rentals. The real estate market has produced outsized returns in the last few years, but will that boon continue into 2023?
As 2022 ended, the month-over-month growth trend began to slip. As for 2023, Analysts predict this trend will continue, and housing prices will decline in 2023. Taylor Marr, the deputy chief economist for Redfin, predicts that 2023 will be the first year in over a decade that home prices will decline.
Mortgage rates had hovered around historical lows for over a decade, but rates began to rise as last year ended. The current mortgage interest rate is nearly double what it was a year ago. This increase in mortgage rates applies downward pressure to housing prices. As interest rates rise, borrowers must pay less for a house to keep the same monthly payment. The fed has signaled that there will be at least one more rate increase, further depressing home values.
Should You Buy A Rental Property in 2023
If you purchase rental properties at market value and plan to grow wealth with property appreciation, 2023 is not the year to buy real estate. The chances are values will end significantly lower than when the year began. However, a real estate investor should never buy a property at market value. The skill you must cultivate is finding properties selling at a discount to the market value and then making the needed change to realize the actual value.
While appreciation rates will likely be negative, the long-term yield on a rental portfolio is about 6.8% annually. This number can be much higher if you purchase a house below market value. My article that teaches you how much to pay for a rental house does not recommend buying at market value. If you are not buying at market value, then the general market is of little interest to you.
With the increase in adjustable-rate mortgages and falling home values, homeowners may want to get out of their expensive properties. The foreclosure attorneys at nolo.com expect foreclosures to increase in 2023. These are some of the factors that increase your chance of finding under-market properties.
Finding deals that allow you to purchase and renovate significantly below market value is how you amplify your gains when investing in single-family rentals. Finding these great deals has been difficult in recent years, but 2023 looks to be a better year for this. The general market doesn’t matter; when you can find good deals, you should buy them.
Conclusion
For 2023, the selling prices of rental property and all other homes will likely drop. In addition, mortgage rates will rise, increasing the cost of ownership. These factors will depress growth and likely lead to a decline in housing appreciation.
Is buying rental property in 2023 a good idea? It certainly is when you find an excellent below-market deal. This is not an exception for 2023; it’s the general rule for investing in rental properties. In all climates, scoop up all the great deals you can, and leave the market-value properties to someone else.
