The real estate market is rarely out of the media now. The pandemic saw huge rises in property prices. And demand for homes went through the roof. Now though, high inflation and mortgage rate hikes are causing consternation for buyers.
Real estate has often been recognized as a solid investment. Bricks and mortar are tangible, unlike other investment options such as crypto or NFTs. Even in hard times when recessions have bitten, the property market has always found a way back.
Now, the value of the world’s real estate is the highest it’s ever been with the potential to go higher. But, is 2023 the right year to acquire property?
Is this a good year for real estate acquisitions?
Expert opinions are divided on the housing bubble. Some analysts believe house prices will drop slightly, while others believe there could be more rises. Depending on the region, many analysts are predicting further property price rises.
John Pribble, Principle of DFW Hard Money says “Buyers are returning to the property market, and with inventory remaining low, demand could push real estate prices up”.
Much will depend on how mortgage rates are affected throughout the year. If there are further raises by the Fed, then mortgage rate rises may deter buyers further. However, if demand increases, real estate prices might see another surge as they did during the pandemic.
How much should you invest in acquisitions?
Investing in any acquisition should be done with a degree of comfort. Overstretching can lead to greater risks and heavier losses if things go belly up. If the doomsayers are correct, the property market might see a steep decline in value. Any real estate acquisition would therefore represent a loss in the short term.
The length of the investment is a serious aspect. Long-term investments might be seen as higher risk. This is because future outcomes cannot be seen or predicted accurately. Yet, real estate has always proven a reliable long-term option for investors.
As a general rule, the best way to budget is to set aside 50% of disposable income for necessary payments such as mortgages and food. 30% should be allocated for leisure, entertainment, and less essential purchases. The final 20% of income should be used for saving or debt repayment.
With experts recommending 10% to 15% for savings or a little more, this might be your guideline for investing. Now, 15% of the average person’s income won’t be very effective in real estate investment. So, options for acquiring control of real estate and financing purchases should be focused on.
Best options for acquiring real estate
Acquiring control over real estate may be done in several ways. Property investment needs large sums of money and includes a significant amount of risk. Therefore, a proper real estate investment strategy should be drawn up.
Buildings can be bought outright, or long-term leases can be purchased. Yet, there are ways to get involved with real estate that don’t require actual ownership.
Fixing and flipping houses
At the other end of the spectrum is fixing up homes to sell on. This type of real estate investment involves identifying distressed properties also. However, unlike wholesaling, there is no middleman.
Fixing and flipping represents a very realistic way of acquiring real estate in today’s market. With property prices being high, buying distressed homes requires substantially less finance to be in place.
How to finance real estate acquisitions?
Real estate acquisitions might involve serious money. An investor who has cash available can purchase properties outright. This is the ideal route for anyone fixing and flipping properties. But, property development may involve more than one investor and vast amounts of financing.
There are many loan options for real estate acquisition, with some suiting commercial developments more, and others designed for residential homes.
Some real estate acquisitions are planned to be short-term investments. Others are for the longer term. The type of acquisition will determine what loan option is most suitable. Here is a short look at two of the different financing choices.
Hard money loans
A type of short-term loan that is popular with property investors. A hard money loan might be considered similar to a bridging loan in that it may be used to bridge the gap between project completion and a sale.
For instance, Bob is fixing up a distressed property and is 90% complete. But, Bob’s finances have run short and he needs a loan. A hard money loan will allow Bob to finish the project and sell the house.
One major difference between hard money and a traditional bank loan is the lending criteria. Bob doesn’t need to have a good credit rating. He only needs to leverage the property and agree to the lending terms.
Traditional loans and mortgages
Many buyers are still concerned with today’s mortgage rates. However, banks are still lending, and mortgages are a common way to purchase real estate.
A possible option for building up a real estate portfolio is to buy to let. This means buying property specifically to rent out. Letting out property successfully will mean the tenant effectively pays the mortgage, and possibly more.
Is real estate the best choice for investment?
For long-term investments, the earlier they are started the better. Retirement plans and savings will accrue more if they are started earlier rather than later. But, this doesn’t mean all investments provide the same ROI.
While future events cannot be predicted, historically, the real estate market has proven to be worth investing in. If analysts are right, then there is no imminent property market crash.
Summary
Understanding regional property markets will be key to making the right acquisitions this year. Purchasing distressed properties is one way to acquire real estate with a lower cash investment. The potential for a healthy return from house flips remains in place in 2023.