Real Estate

3 Investing Mistakes You Don’t Want To Make In 2023

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From skyrocketing interest rates to market pullbacks, increased rental demand, and everything in between — 2022 was a bumpy ride for real estate investors across the country. It was enough to make anyone’s head spin. 

But it’s a new year, and you’re putting pen to paper and setting new goals for your real estate investing in 2023. While you may be focusing on what you’re going to do to drive your real estate investment strategy into 2023 successfully, it’s also a great time to take a hard look at what not to do. 

Here are three things that every savvy real estate investor should consider adding to their not-to-do list.

1. Don’t Sit On The Sidelines

“Some people want it to happen, some wish it would happen, others make it happen.” – Michael Jordan, NBA Superstar

As we embark on 2023, interest rates will likely be higher than you’d like for longer than you’d like. Does that mean you should sit it out and wait to jump into your next deal? No — actually, quite the opposite. Some real estate investors are finding less competition than they have in several years! Shifting strategies and finding new markets is a great way to remain active as affordability continues to worsen.

Your moves may be emboldened by factors like homebuyers pushing pause on their purchasing plans because they’re worried about how a possible recession could affect their job security. This factor, coupled with other market dynamics, such as high mortgage rates, could keep demand for rentals strong in 2023.

The best deal you can get is the deal you have in hand, given the math makes sense. We can sit here and play the “what if” game until we’re blue in the face, but the simple fact is that none of us can predict the future. So, do the deal now if it still pencils — it’s all about the math. 

Focus on the trusted lender relationships you know can get the deal done. While you may potentially pay a little bit more with the rate, the certainty of execution and action is going to be your strongest form of currency in the current market.

2. Don’t Get Burned

Education is when you read the fine print. Experience is what you get if you don’t.” – Pete Seeger, American folk singer and social activist

As a real estate investor, you most likely work with hard money lenders to finance some, if not all, your deals. Hard money loans are quick, flexible, and can be relatively easy to secure, but it’s essential to do your due diligence and understand the fine print before jumping in. 

Make sure to discuss any prepayment penalties that might be lurking in the fine print. If you find the penalties to be excessive, stay away. Instead, try to focus on flexible prepayment penalties. After all, the goal of a hard money loan is to provide short-term financing. As such, if you can, avoid any lending option with a severe prepayment penalty that could lock you into a high interest rate payment for an extended time.

Another thing to be on the lookout for is a forward rate lock or a guarantee that the lender will honor a specific interest rate at a specific cost for a set period. This strategy may insulate you from market fluctuations, which is essential, especially if you’re financing or refinancing into a long-term agreement for a rental investment. If your current lender is quoting you a rate that floats during underwriting, run away — fast. 

Why? Failing to lock your rate can be costly in a rising-rate environment. Imagine signing up at today’s rate, and a few days before closing, you realize your rate has moved by 25-50 basis points! Your debt service could then be constrained to a lower loan-to-value (LTV), not looking at the same cash-out proceeds, not to mention the impacts this will have on your monthly cash flow. 

Look for lenders that offer forward rate locks on their rental investment loans. This will allow you to maximize cash flow and grow your business in the current market. 

3. Don’t Wait To Get Your House In Order

Circumstances change, and you have to be proactive about changing with those circumstances.”  Paul DePodesta, Chief Strategy Officer of the Cleveland Browns

Pay off your revolving debt and get your FICO® Score as high as possible. The FICO® Score is one of the leading tools for measuring your creditworthiness and accessing the financing needed to maximize your ROI. Lenders require an efficient way to decide whether or not to qualify you for a loan and what interest rates to offer. In most cases, they will look at your FICO® Score before pre-qualifying your application and approving your loan. There’s no better time than now to start the work to improve your score. 

Having liquid funds available can be vital because of the flexibility it provides. Cash on hand can be invaluable in times of financial uncertainty — thus the phrase, “cash is king.” So, build your coffers for those opportunities that will present themselves. And trust me — they will present themselves. 

Consider holding off on discretionary personal spending to raise liquidity levels and have cash sitting on the sidelines for when the right investment opportunities come along. Get your deals done now and take some cash out — that way, you can buy with cash if you need to in 2023. Since those deals will be at the deepest discounts, you can figure out a refinance to take the equity out and recapitalize it.

Final Thoughts

Fortunes can be made in real estate during a down market — look at some publicly traded real estate investment trusts as an example — and 2023 has all the signs for a decelerating housing market that may or may not be accompanied by a recession. Distressed sellers can emerge during times like these, creating an opportunity for real estate investors to buy low and generate cash flow to help ride out the storm.

Rental vacancies and home-buying demand went to one of their lowest points in history during the crash of 2008. Yet, some real estate investors were able to exponentially grow their wealth by planning ahead, and the years following were among the best times in history for real estate investing. Experts are predicting we’re a long way off from a major housing correction like we saw from 2008 to 2012, but there will undoubtedly be opportunities out there this go around. 

The bottom line? As you move into 2023, keep your eyes open for opportunities as they present themselves.

This article is presented by Kiavi

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