For real estate investors around the nation, 2022 was a rough year due to soaring interest rates, market declines, rising rental demand, and everything else in between. Anyone's brain would have spun from the situation.
However, since it's a new year, you're making fresh resolutions for your real estate investing in 2023. While you may be concentrating on what you'll do to effectively advance your real estate investment strategy into 2023, now is a wonderful moment to look closely at what not to do.
Here are three items that every shrewd real estate investor should think about putting on their list of things to avoid.
1. Don't remain inactive
"Some individuals desire for it to happen, while others actively work to make it so."
Interest rates are probably going to be higher than you'd like for a longer period of time when 2023 gets underway. Does that imply you should wait to enter your next deal and sit it out instead? No, just the opposite is true. There is less competition now than there has been for some real estate investors in recent years. If money gets tighter, changing your strategy and going to new places are great ways to stay busy.
Your actions can be encouraged by things like homebuyers delaying their plans to buy because they are concerned about how a potential recession might affect their job security. This aspect, along with other market characteristics like high mortgage rates, may help maintain a healthy rental market in 2023.
If the math makes sense, the bargain you already have is the best one you can obtain. The truth is that none of us can foresee the future, no matter how long we sit here and play the "what if" game. So, if the math still adds up, go ahead and close the purchase.
Concentrate on the connections you have with reliable lenders that you know will close the deal. The assurance of execution and action will be your best form of currency in the current market, even though you might end up paying a bit more for the rate.
2. Avoid Burnout
"Reading the small print is education. If you don't, experience is what you get."
As a real estate investor, you probably use alternative lenders to finance at least some of your deals, if not all of them. Alternative loans are often quick and flexible, but it's crucial to conduct your research and comprehend the fine print before signing anything.
Any prepayment penalties that might be concealed in the small print should be brought up in conversation. Stay away if you think the penalties are too severe. Try to concentrate on flexible prepayment penalties instead. After all, most alternative loans' main purpose is to offer short-term finance. As a result, avoid any lending option with a large prepayment penalty that could force you to make long-term payments at a high interest rate.
A forward rate lock, which ensures that the lender will honour a specified interest rate at a specific cost for a set term, is another thing to be on the watch for. In particular, if you're financing or refinancing a long-term arrangement for a rental property, this technique may protect you from market swings. Run away quickly if your present lender is offering you a rate that fluctuates throughout underwriting.
Why? In a rising-rate market, it might be expensive to not lock in your rate. Imagine signing up at the current rate and finding out a few days before closing that it has changed by 25–50 basis points (0.25-0.5%)! Without the same cash-out proceeds, your debt service may be limited to a lower loan-to-value (LTV), which will affect your monthly cash flow.
Look for lenders who provide forward rate locking on their loans. By doing this, you'll be able to expand your company in the current market and maximize cash flow.
3. Don't Put Off Organizing Your Home
"You must be proactive about adapting to new conditions because they happen."
Increase your credit score by paying off your revolving debt. Your credit score is one of the most important ways to figure out how creditworthy you are and get the money you need to get the best return on investment. Lenders need a quick way to determine your eligibility for a loan and the interest rate they should charge. Before granting your loan and pre-qualifying your application, they will often check your credit score. There is never a better moment to start working to raise your score than right now.
Having liquid assets on hand can be essential due to the flexibility they offer. The adage "cash is king" refers to how advantageous having cash on hand may be in unpredictable financial times. Therefore, increase your savings in preparation for the possibilities that will arise. I assure you that they will show up.
Refrain from making impulsive purchases to increase liquidity levels and keep cash on hand for when the perfect investment opportunities present themselves. In order to be able to buy with cash in 2023, close your deals now and withdraw some cash. You can plan a refinance to take the equity out and recapitalize it because such agreements will be at the greatest discounts.
Looking at some publicly traded real estate investment trusts as an example, fortunes can be made in real estate during a down market. There are signs that the housing market will slow down in 2023, which may or may not be accompanied by a recession. In these situations, there may be sellers who are in trouble. This gives real estate investors the chance to buy at a discount and make money to help them get through the storm.
The 1980s and 1990s saw some of the lowest rental vacancy rates and house purchase demand in Canadian history. But with careful planning, some real estate investors were able to increase their wealth by a huge amount. The years that followed were some of the best in the history of real estate investing. There won't be a significant housing downturn like the one that occurred from 1989 to 1996, according to experts, but there will still be possibilities this time around.
The final word? Keep an eye out for possibilities as they arise as you transition into 2023.