Residential and commercial real estate properties have always been one of the best types of investments. Real estate investments bring money both in the short term (via rental income) and the long term (via appreciation) and involve far less risk than other investment strategies. While investing in real estate traditionally required significant initial capital, this barrier has been lowered through the recent advancement of technology. Blockchain technology, in particular, has made fractional ownership easier and more accessible than ever before.
As the past two years have witnessed major challenges to both homeowners and real estate investors, it’s natural for many to wonder whether investing in real estate will make sense in 2023. My reading of the real estate market, as well as those of experts I have come across, indicate that next year will be a good time to invest in real estate. In this article, I’ll discuss why you should consider adding real estate properties to your investment portfolio in 2023. I’ll also highlight a few things to keep in mind when doing so.
Four Factors That Make 2023 a Good Year to Invest in Real Estate
First, let’s take a look at the four most prominent real estate trends expected in 2023 and what they mean for investors:
Real Estate Prices Will Appreciate Only Modestly
One real estate trend that has dominated the last couple of years has been the unbelievable spikes in home values. According to the latest data from Zillow, the price of a typical American home increased by 44% between October 2019 and October 2022. To put this in perspective, the average annual residential real estate appreciation rate has been 4.1% since 1991.
Understandably, investors are worrying that this trend will continue into 2023. This would push many people—particularly newbies—out of the real estate market and towards other investment opportunities. The good news is that these unsustainable increases in property prices are over with the pandemic fading away, and the regular forces affecting the real estate market are returning.
Real estate experts have varying opinions on what the appreciation rate will look like next year, but most agree that residential property prices will not go up by more than 3-4%. Some go far enough to predict that home values might even start decreasing. While we can definitely see declines in some markets, I believe we have no reason to talk about a real estate market crash or expect declines across the US housing market.
Therefore, the predicted return to normality in terms of appreciation is one reason to consider investing in real estate in 2023.
Elevated Mortgage Rates Are Lowering Competition
Another major obstacle that property investors experienced in 2022 was the rise in mortgage rates. After we saw historically low interest rates in 2021, the beginning of 2022 marked a reverse in this trend. In October and November of this year, the 30-year fixed-rate mortgage (FRM) interest rate crossed the 7% line, reaching its highest level since 2002. Needless to say, this put additional pressure on real estate investors—especially beginners with limited access to alternative financing resources.
However, mortgage rates quickly went back below 7%. So, what are the expected real estate trends in this regard for 2023? Expert forecasts actually vary widely. A recent poll among eight real estate industry experts quoted forecasts ranging between 5% and more than 9% for the 30-year FRM. Meanwhile, the Mortgage Bankers Association expects the interest rate to drop to 5.4% by the end of 2023. It all depends on how additional (mostly exogenous) factors will affect the real estate market in general, as well as the mortgage market specifically.
From an investor’s point of view, mortgage rates rising above the levels we are used to seeing in recent years is not all bad news. These elevated interest rates will push many homebuyers and small-scale investors out of the market, lowering competition among investors with access to some capital and/or alternative sources of financing. This means you should definitely keep an eye out for potential opportunities to invest in real estate in 2023.
There Will Be a Shift to a More Neutral Market
Yet another trend that dominated 2020-2022 was a strong, hot seller’s market in real estate. Due to limited inventory and vigorous demand, many buyers either left the market voluntarily or could not get access to deals as they were pushed out by more experienced players.
While there are disagreements about many other trends in the 2023 real estate market, there is a general consensus that there will be a shift towards a more neutral market. I don’t expect to see a buyer’s market yet (at least across the US), although it’s possible in some local markets. However, the market will be cooling off for sure. We are already seeing an increase in inventory of 47% y-o-y in November 2022. The higher than usual mortgage rates will also contribute to this trend.
This means that real estate investments will become more feasible—even for new investors who have little experience and relatively limited financial resources.
Technology Will Continue Enhancing Real Estate Investments
The proptech industry has undergone major developments in the past decade, greatly facilitating the investor journey.
Some real estate technology startups provide access to alternative financing options such as hard money, private money loans, and even crowdfunding. Others offer tools that help investors identify and evaluate market and property opportunities faster than even before. Yet another group offers off market properties that sell at more affordable rates. Moreover, proptech startups like Lofty and HoneyBricks combine the power of blockchain technology and real estate to offer investors opportunities to enter the real estate market through crypto currency and crypto wallets. This enables them to start investing with as little as $50.
So if you are hesitant to invest in real estate in the coming year, look into the ways that technology can enhance your options and optimize your performance.
Three Things to Keep in Mind When Investing in Real Estate in 2023
I believe that all of these factors make 2023 a potentially good year to invest in real estate. However, that doesn’t mean that any strategy or any investment will do the trick and bring you the profit you’re hoping for.
Here are three tips that can help maximize your real estate investments next year (and beyond):
Look for Alternative Financing Options
As mortgage rates are generally not expected to go back to their 2020-2021 levels, investors should look into options beyond conventional mortgages. That’s one of the advantages which real estate investors have over homebuyers. The latter are mostly restricted to mortgages, but the former can explore options like hard money loans, private money lenders, home equity, crowdfunding, partnerships, and even syndications.
Consider Different Real Estate Investing Strategies
When hearing about investing in real estate, many imagine buying a single-family home or an apartment to rent out on a short-term or long-term basis. The truth is, there are many other real estate investment strategies that might be a better fit for the needs of both beginner and experienced investors. You can consider strategies like house hacking, flipping, wholesaling, arbitrage, and others. Of course, do not forget to take a look at real estate investment platforms focusing on fractional ownership of investment properties. In many cases, these are significantly more affordable and easier to navigate than traditional real estate investments.
Harness the Power of Technology
Last but not least, as a firm believer in the great potential of technology in the real estate industry, I feel compelled to urge everyone aiming to invest in real estate in 2023 to investigate the ways that technology can help them along the way. Whether you need some support in finding good opportunities, analyzing deals, financing, fractional investing, or anything else, there are tech-based solutions that will provide you with the necessary support. If you ever need help in identifying them, I would be more than happy to lend a hand.
Final Words on Real Estate Investing in 2023
In conclusion, I want to emphasize two things once more. First, overall trends promise that 2023 will be a good year to invest in real estate. That being said, any year can be a good time for real estate property investing as long as you leverage the right strategies and obtain access to the help you need. This leads me to the second takeaway: Do not underestimate the value that technology can provide in your investment decisions. Whatever problem you are facing, there is likely a proptech entrepreneur and startup that has come up with an effective solution for it.