When is it Truly the Best Time to Get Into Real Estate?

In the first half of 2023, only 14 of every 1,000 U.S. homes changed hands. That’s down from 19 out of every 1,000 during the same period in 2019 and represents the lowest share in at least a decade.

Needless to say, the housing market is experiencing a slowdown, leaving some prospective investors uncertain whether now is a good time to get into real estate. However, with the right strategy, you can make money in any market.

In this article, we’ll explore factors to consider before investing in real estate, market trends to watch, and which investment strategies these call for.

Factors to Consider Before Investing in Real Estate

Before investing in real estate, get your financial house in order. That means maintaining a steady income, building an emergency fund, reducing debt, and keeping a high credit score. The more financially secure you are, the better positioned you will be to buy (and secure financing for) an investment property.

Also, determine how much risk you’re willing to take on (i.e., your risk tolerance). Though real estate tends to be more stable than other investments, such as stocks, it still comes with risks. Being aware of these is crucial to making informed investment decisions.

Lastly, consider your investment goals: Are you looking for long-term appreciation, regular rental income, a quick profit, or some mix of the above? Your objectives will have a major impact on when and how you should invest.

The best time to get into real estate is when the right deal presents itself, and you’re in the financial position to take it. But the right deal will look different based on market conditions and trends.

Here are five factors to watch right now and how they might impact your investment strategy.

Market cycles

Real estate follows market cycles. On a macro level, these can be broken down into four phases:

Recovery: This is a period of expansion that follows a market downturn. Consumer confidence and demand increase, and property values go up.
Peak: This is the height of the real estate market cycle. Housing demand and activity are at their strongest, leading to high property values.
Contraction: This is when the market starts to cool down. Housing demand and property prices begin to fall, and sellers may struggle to sell their properties.
Trough: This is the bottom of the real estate market cycle. Buyer demand and housing activity hit a low before the market starts to recover, and the cycle repeats.

As an investor, it’s important to understand the current phase of the market cycle. Right now, we are arguably in a period of contraction, which means purchasing a property may be less attractive due to potential short-term depreciation or high financing costs. Consequently, taking a long-term buy-and-hold strategy, finding rental properties that cash flow now, and exploring creative financing options may be worthwhile.

If you’re worried about a major housing crash (the trough phase) in the near future, know that these are hard to predict and only occur about every 18 years.

In addition, the housing market also undergoes seasonal cycles. In the winter, housing activity slows down because few want to move when it’s cold. Then, in the spring, it starts picking up again. By summer, home sales usually reach their peak.

For investors, this means you may have more property selection in the spring and summer but more bargaining power in the winter (when buyer competition is lower).

Ultimately, savvy investors can make money in any market. The key is to have a broad range of investing strategies at your disposal.

Mortgage rates

Mortgage rates can directly impact your real estate investing strategy. The higher they are, the higher the cost of financing an investment property. Consequently, the potential return must be that much higher to make the investment worth it.

Since last November, mortgage rates have been hovering around 6% to 7%. This has kept many homeowners with mortgages locked in at or below 4% from selling. It’s also dampened buyer demand.

However, the current rates appear to be the new normal and may even go higher. (Keep in mind that 7% is still relatively low by historical standards.)

As a real estate investor, this means you shouldn’t count on lower mortgage rates anytime soon. So, if a property deal looks good on paper now, potentially getting a lower mortgage rate in the future shouldn’t hold you back. Plus, even if mortgage rates drop, you can always refinance your mortgage later.

Rent growth

Rent growth refers to the overall increase in rental prices over time. It’s an important metric for landlords, who depend on it to cover their rising property expenses (e.g., from property taxes and home insurance) and to make a profit from their investment.

While rent growth generally keeps pace with inflation, it went negative for the first time since 2020 in May, when asking rents dipped by 0.6% year over year. In other words, new rentals are commanding less in rent than they were a year ago.

For investors, this trend may be concerning. After all, you want to be able to rent your properties for more in the future, not less.

However, keep in mind that negative rent growth doesn’t apply to existing rentals, which tend to be sticky (i.e., more resilient to market changes). So, as long as a rental property deal doesn’t depend on raising rents in the foreseeable future, it may still be a worthwhile investment.

Lastly, the specific market you are investing in will determine the rent growth, so make sure you research specific regions to understand if your region is in growth or decline.

Regional market differences

Real estate markets vary widely by region. For example, some states have stricter landlord regulations than others. Similarly, property values may be dropping in one city and going up in another.

In fact, right now, there is a stark divide between housing markets in the West and the East. In the West, home values are generally falling, while in the East, they are still rising. Staying on top of such trends can help you decide where and how to invest.

Pro tip: Use PropStream’s Property Search to identify where home values are rising and where they are falling.

Other market trends

Finally, pay attention to other real estate market trends. For example, the rise of remote work during the COVID-19 pandemic and the failure of many return-to-office policies since then have left many office buildings vacant or underutilized. This puts downward pressure on commercial real estate values, which can indirectly impact the value of nearby residential properties.

Similarly, the shift to remote work created pandemic boomtowns, many of which are now suffering the most from market corrections.

Another unique trend to note is the recent boom in new construction homes. According to the Wall Street Journal (subscription required), “Newly built homes accounted for nearly one-third of single-family homes for sale nationwide in May, compared with a historical norm of 10% to 20%.”

The reason? There is a massive shortage of existing home supply. While these new homes may be good investments in and of themselves, the increased supply may also dampen the rise in nearby home values.

Final Verdict

As you can see, market conditions vary, but there are always ways to adapt your investment strategy to them. For example, you may need to pursue seller financing when mortgage rates are high, make a cash offer to sweeten the deal in a seller’s market, target off-market properties when housing supply is low, or consider a fix-and-flip strategy to avoid losing profits to a looming market correction.

Whatever you do, remember to take the long view. There may be short-term risks, but any property held long enough usually goes up in value. In real estate, time in the market usually beats timing the market.

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Important note: PropStream does not offer financial advice. This article is for educational purposes only. Please consult a financial professional for further assistance.