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Picture this: It’s New Year’s Eve, 2022, and you’ve finally committed to a resolution you really want to keep. In the coming year, you want to buy your first rental property and start investing in real estate. But what will real estate look like in 2023? Will housing prices continue to drop? There seem to be more questions than answers.
If this scenario sounds like you, you might feel intimidated by the uncertainties of the coming months. Deciding to buy your first rental property can feel like a scary or risky endeavor in any market climate, but doing so during a housing correction may seem even riskier. You might be questioning your decision and wondering, “Is buying rental property worth it?”
Before you throw out your resolution, however, reconsider what you know about real estate and how to retain and increase its value. This article will hopefully give you some of the tools and resources to invest in any market and demonstrate that 2023 can still be a fruitful time to buy your first property.
Related: How to Start Investing in Rental Properties — Your Step-by-Step Guide
What is a housing correction?
First things first: What is a housing correction?
A housing correction is a period during which housing prices start to fall in some places after a rapid rise. This fall is usually only by 10% or less, according to U.S. News & World Report. It typically occurs because home prices were unsustainably high in recent years, and the market therefore “corrects” itself to more reasonable prices that match the current supply and demand. Corrections are more gradual than housing market crashes, but they can last anywhere from a few months to a few years.
Housing corrections are caused by interactions between a variety of factors, including mortgage rates, supply, demand, affordability, inventory and stock market trends. Analysts track these factors over time to look for signs that prices will soon fall. These signs can include a decline in sales, homes selling more slowly and homes selling for significantly less than just a few months prior.
Many people who own property during a housing correction may worry that their properties aren’t worth as much as they used to be. However, housing corrections aren’t inherently “bad,” nor do they spell the death of your rental business. In fact, they can make home-buying possible for first-time owners or those looking to start their investing journeys without competing with high-capital peers. Corrections are part of the real estate cycle, and knowing what to expect can help you navigate one with confidence.
What’s happening in 2023?
Analysts and economists are monitoring the housing market, and many have predicted that a housing market correction has already begun or soon will. Today, the national housing market is up by only about 6% compared to March 2022, which is a relative slowdown in comparison to 15% a few months prior. Experts predict that house prices will continue to fall through 2023, with the markets that grew the fastest in the past year likely to see the starkest decreases (even up to 30% in overpriced cities).
Why is this happening? Experts cite a few factors. For one, there are fewer people looking to buy expensive homes than there were in previous years. Many Baby Boomers now have fixed incomes and aren’t as interested in buying expensive homes, which is a natural cause of corrections. Meanwhile, young families are looking for starter homes.
Related: 5 Tips for New Investors Who Want to Make Money With Real Estate
How and why you can still invest during a housing market correction
Don’t let decreasing prices discourage you from investing in real estate. A good deal is a good deal, and if you do your research, you have a good chance of securing a lucrative one.
The key is to stay informed on market trends and be patient. Housing corrections are temporary, and they help transition from a seller’s market to a buyer’s market, so you can actually benefit from this period of low prices. Plus, as experts at BiggerPockets remind us, housing prices do not equal profit. There are a variety of other ways to earn revenue in real estate besides appreciation. Cash flow, value add deals and tax benefits all make real estate worth it even in less-than-ideal markets. It makes sense to be cautious, but don’t let that prevent you from taking advantage of great opportunities when you find them.
Buying a rental property
So, you’ve decided to buy a property in 2023: What do you need to know?
When considering what to know when buying a rental property, one of the most important steps is analyzing the local market. Local data is more useful than national averages any day, as it will provide the clearest insight into the rental marketplace in the specific area you’re targeting.
When choosing a property, the best way to get a picture of local demand is to survey local rent rates of comparable properties nearby. For a given property in that area, you’ll be able to estimate approximately how productive that investment will be.
To do this, you’ll want to calculate ROI, or return on investment. ROI for rental property is the ratio of income you’ll generate to your initial investment or purchase price of the home. To calculate it, divide your expected annual return by the purchase price. If the resulting percentage is 10% or more, it is typically considered a good investment.
Remember that you can increase your ROI by adding value to your property, then increasing the rental rate. For instance, if you add another bedroom and bathroom to a single-family home, you now have a property worth far more than the one you started with. You may have bought the house at below-market value during a correction, but you’ll soon make up for it in revenue generation and appreciation as the market leaves the correction period.
Related: 6 Effective Real Estate Investment Strategies
Legal and administrative tasks:
You’ll also have some legal and administrative tasks on your checklist for buying a rental property. Namely, you should hire a licensed property inspector to review the property before finalizing the deal. You don’t want to discover that the home has severe infrastructural problems or water damage after you’ve already locked yourself into a price.
Other important tasks include reading over the property title documents to confirm the seller’s ownership, confirming property tax receipts and writing up a solid property purchase contract. You may have an agent assist with this process. The goal is to clearly define and explain the terms of the sale so that you know exactly what you’re paying for. Many of these steps are also required by lenders to secure a mortgage — your lender has an investment in the property, too, so they also want to ensure you’re making smart choices.
Becoming a first-time landlord doesn’t come without its challenges. The first step is to find and analyze a great deal that will lead you toward financial freedom. By following these tips, you can be a successful real estate investor in any market season.