Please ensure Javascript is enabled for purposes of website accessibility

4 Biggest Risks of Real Estate Investing in 2023 and How to Minimize Them

Real estate investing is one of the surest paths to building wealth, but it’s not without certain risks. And in 2023’s unsettled and hazy market, those risks could sneak up on you. 

With demand tanking, prices flattening, mortgage rates at historic highs, inventory increasing, and general inflation driving up costs across the board, this is a completely different market than the one that investors were operating in for the past decade. And the only thing the experts agree on is that no one knows where it’s going from here. 

READ — How Do Interest Rates Impact Real Estate Investing?

So what should a real estate investor do in 2023? There’s no easy answer to that question, but we can tell you how to tackle and minimize some of the biggest risks of real estate investing in 2023. 

If you’re flipping houses, you might want to consider becoming a landlord

Flipping houses has been extremely profitable for the past decade, but 2023 should see the market tightening up quite a bit. With demand sagging, rehab costs going up, and days on market doubling or even tripling, house-flippers have a little tougher path to profitability than before.

So why not try the landlord route? With mortgage rates at historic highs, many would-be home buyers are opting to rent. Going from “fix and flip” to “fix and hold” could be an easy way to wait out the market — while collecting some very nice rental income. Who knows, you might even prefer being a landlord to flipping houses.

Buying will be easy — maybe too easy

After years of maxed-out demand and escalating prices, the market has cooled. Put off by high mortgage rates, individual buyers are sitting out, and even iBuyers, stung by 2022’s flattened price curve, have largely paused their acquisitions. Inventory is inching up, projected to increase in 2023.

For individual investors, that means it’s going to be a lot easier to buy in the coming year. There are more properties to choose from, since competition is at a low ebb. For many investors, especially ones sitting on a lot of cash, this could present an irresistible opportunity to go on a buying spree.

But be careful! After so many years of steep competition, it’s easy to get caught up in the moment and snap up a property (or five) without doing your due diligence. Although it definitely makes sense to take advantage of a slow market, stay cautious, stick to your principles, keep an eye on your investment goals and resist the temptation to buy just because you can.

READ — Start Investing in Real Estate: 6 Tips for Millennials

Don’t forget to keep close track of your finances

No matter how solid your financial situation is, now is the time to keep a very close eye on your cash flow and your obligations. You’ve probably heard the expression, “death by a thousand cuts.” In 2023, you could very easily go broke by a thousand cuts. 

Why? Well, the simple answer is that some investors are getting squeezed on both sides. Prices have flattened or declined in many markets. Interest rates have skyrocketed. The price of materials and contractors have increased. Rental rates have sagged, meaning that your income projections might fall short. Homes are sitting on the market longer, leading to carrying costs piling up, which can eat into your profit margins. Not to mention the historic inflation across the rest of the economy.

All of these little cost increases can add up faster than you think and burn through your cash reserves. Avoid being taken by surprise by keeping a close eye on your cash flow and constantly updating your projections with the latest data.

The market will evolve (again)

The pandemic seriously disrupted the real estate market almost overnight, as many fled large urban markets to settle in the suburbs and more rural areas. This deflated several booming city markets and sent prices rising in formerly sleepy regional markets. Investors followed, and some of the top house-flipping markets in 2022 were smaller cities like Greensboro, North Carolina, Scranton, Pennsylvania, and Buffalo, New York.

However, that trend seems to be on the verge of reversing in 2023. With the pandemic waning, many big employers are looking at ending or curtailing work-from-home policies, which would lead to a huge migration back to cities. That could give investors a bit of whiplash just when they thought they were settling into a new normal.

Avoid getting caught on the wrong side of the curve by keeping a close eye on movements in smaller, regional markets, as well as on big-picture employment issues. Then, allocate your money accordingly. And as you shift your investments between markets, don’t overlook new money-saving measures, such as buying or selling with low-cost real estate agents. Those commission savings add up fast!

 

Screen Shot 2021 12 28 At 113128 AmLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more. 

8 Questions to Ask a Potential Real Estate Investing Partner

Investing in real estate is both lucrative and challenging. For this reason, many people choose someone who shares the same vision and offers a complementary skillset as their real estate investing partner.

The ideal partnership will take your business to new heights. You may even achieve a level of success that wasn’t possible on your own. On the other end of the spectrum, a failed partnership can lead to legal feuds and wasted money. Picking the right real estate investing partner is crucial and can easily make or break your vision. 

In addition to selecting a reliable real estate agent, choosing a real estate investing partner is one of the most important decisions you will make. Here are eight questions to ask potential candidates to help you get it right the first time.

READ — 6 Advantages of Getting a Real Estate License as an Investor

Are You in a Good Position Financially?

This is a question that goes far beyond a person’s salary. The answer should encompass every aspect of financial health, including debts owed and other active investment commitments. The right person will be open and honest during this type of conversation, providing a clear picture of their financial standing. Be wary of anyone who seems guarded or private in this discussion. 

Do We Share the Same Values and Vision?

Your values make up who you are and determine how you embrace success or navigate challenges. Honesty, respect, and integrity are all examples of values that help a person develop a moral compass. Ask your potential real estate investing partner about the values they find most important.

Be sure to discuss your vision for the partnership and future endeavors. You should be on the same page regarding both short-term and long-term goals. For example, are you open to exploring FSBO listings or would you rather stick to investments that are backed by a real estate agent? Is the goal to create a lucrative business to put on autopilot, or do you want to actively and continually grow the portfolio? 

Many disagreements arise from real estate investing partners who don’t share the same vision for the business.

What Are Your Expectations?

Realistic expectations are essential when it comes to real estate investments. Many people make the mistake of assuming they’ll achieve maximal results with minimal effort and small amounts of capital. 

Although real estate can provide passive income in some situations, it usually takes time and effort to get there, not to mention a substantial initial investment. Discuss the expectations your potential real estate investing partner has and ensure you’re on the same page, both grounded in reality.

READ — How to Invest in a Rental Property with No Money Down

How Do You Handle Stress and Pressure?

Real estate is a high-stakes business where things can quickly go awry. Even the smoothest transactions are filled with pressure and stress. It’s important to know how someone handles these types of situations. Ask your potential real estate investing partner for an example of a time they navigated intense stress or scrutiny. You may even want to provide a hypothetical scenario as a prompt to find out how they would navigate various types of situations.

What Are Your Unique Strengths?

Everyone brings their own experience and strengths to the table. Hone in on what your potential real estate investing partner can offer. Do they have proven success in the commercial space? Are they drawn to multifamily housing in large metropolitan cities? Perhaps they’re an expert in flipping houses. Make sure you have a full understanding of what they have to offer and how you can work together to achieve big goals.

How Would You Prefer Profits Be Divided?

Although many partnerships are 50-50, this isn’t always the case, and it doesn’t have to be if you agree on a different arrangement. Ask your potential real estate investing partner how they’d like profits to be divided. Will the division be based on how much money each person invests? What happens if one of you is putting in more time and effort? Will fees and realtor costs be split evenly? This is an important conversation that will help you put a plan in place. 

Who Should Be in Charge of What?

Partnerships can be organized in many different ways. Although it may seem ideal to have each person completely involved in every decision, this is rarely easy to accomplish. 

Some of the most successful partnerships are built on mutual trust that allows each individual to act on behalf of the other person. Whether you’re on vacation or tied up with other business ventures, it’s helpful to have someone who can act in your interest if need be. 

Discuss the ideal landscape of your partnership and whether certain tasks can be delegated. Who will conduct property research? Will someone be in charge of coordinating with the investment real estate agent you choose to work with? Develop a plan for your individual responsibilities from the outset.

What Happens If Things Aren’t Going as Planned?

Even with the best intentions, some partnerships don’t go as planned. In the ideal scenario, this is a mutual revelation that leads to an amicable parting of ways. Discuss the possible scenario of one or both parties wanting to dissolve the partnership. This conversation may be difficult, but it could help you prevent drama and turmoil in the future.

 

Screen Shot 2021 12 28 At 113128 AmLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more.