High interest rates are tough, no question. They squeeze cashflow, and give operators less room to maneuver. But with this challenging environment comes what could be a historic opportunity.
Consider:
• Prices have declined from the overheated past 5 years.
• High interest rates are resulting in distressed owners who have to sell. This wave is growing bigger
• Investment opportunities on the market are more affordable now, offering a chance to buy at a low basis, and be positioned for appreciation as the market recovers and returns to normal.
• Economic Fear. Warren Buffet: “When most investors are greedy, be afraid. When most investors are afraid, be Greedy.” Sir John Templeton: “Wait until there’s blood in the streets, then invest.
• Higher interest rates hurt cash flow, but steeply less competition gives bargain hunters the upper hand in 2023.
Opportunities Emerging
2022 was a challenging year for investors. Debt is the lifeblood of investing, and lower rates not only make investment profitable, for most, it makes it possible.
The stock market fell 16% year over year, dipping into bear market territory on several occasions. Real estate didn't fare much better. Median home prices reached their highest point in history, then plummeted as a brutal, high-interest-rate environment crept in, causing home buyers evaporate.
Covid and economic uncertainty have kept many real estate investors on the sidelines, some for the past several years. Here’s reasons that 2023 could be the year to jump back in.
Here's why:
Hot real estate markets are great for those who already own properties, because their equity rises. But it's not the easiest time to get in. High competition and bidding wars means you're likely to overpay relative to long-term values. For long-term investors, you want to acquire most of your portfolio when prices are below the historical trend.
We’re not yet out of the woods, economically.
Many experts and analysts predict a negative trajectory for 2023.
Goldman Sachs is predicting home price growth could stumble to 0% in 2023. There’s notably less competition in the marketplace, and increasing inventory. 2023 has all the signs of a decelerating housing market that may or may not be accompanied by a recession. It could be a tremendous buying opportunity, that (as always) that most investors don’t recognize until it has passed.
The Great Interest Rate Challenge
Prices may be more affordable in the coming year, but high interest rates will still make buying a challenge. Higher interest rates translate into lower leverage and a higher monthly payment, which eats into the cash flow of the property.
Rental demand is also showing signs of weakness. Investors should be cautious when running numbers on an investment property in 2023, because rents could be lower in the coming months.
Despite these factors, and even because of these factors, it may be an opportune time to jump in. I invested heavily in the wake of the Great Recession, and those are my most successful long-term investments.
By far.
The key is to focus on cashflow and risk mitigation as you're buying. Those who invest during times of challenge and distress have been rewarded handsomely over the long term, and it's likely 2023 could bring similar opportunities.