The current inflation with rising mortgage rates and high loan interest rates scares home buyers and investors. Yet, good-tasting lemonade is made from lemons. Here is, how to invest during the housing correction.
KEY TAKEAWAYS
- Learn what the current housing market correction is and how you can profit.
- Find out how to get into housing investments to take advantage of coming falling prices.
- Learn how timing is important for housing investors.
- Understand why investing in housing rentals is profitable.
- Find out how to profit from housing rentals.
- Learn how to quickly calculate your rental profits.
- Understand the responsibility of a landlord.
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What is a Housing Market Correction?
In September 2022, the chairman of the Federal Reserve (Fed) announced raising interest rates to allow the housing market to go through a “correction”.
To stop runaway rising home prices, the Fed will raise interest rates in the hope it causes a real estate market correction to stop inflation and avoid a recession. In the end, the Fed hopes that home prices will fall and home buyers will afford homes again.
Experts recently published articles about rising mortgage rates asking if it will result in a recession or a housing market crash.
Read this article explaining how “How Real Estate Protects You During Inflation”. You will learn how investing in real estate during high inflation acts as a hedge against inflation.
The national home prices cooling down period is expected to go into 2023. What does this mean for housing investors?
Here’s How To Invest During The Housing Correction
Everyone knows that the best times to invest are when prices are low. This applies to housing investments.
1. Get Into Housing Investments While Prices Are Falling
Warren Buffett once claimed it’s wise for investors to be “fearful when others are greedy, and greedy when others are fearful.” What he meant is prices rapidly rise when others are greedy just like the national housing prices in late 2021 and early 2022 when it became a seller’s market.
Yet, once the Fed raised interest rates last July and September, national media ran stories about rising mortgage rates making buyers unable to afford homes. Also, that inflation is rising and a possible national recession is looming.
On November 4, 2022 CNN headline screamed: “Interest rates will keep rising. How high will they go?” The New York Times on November 3, 2022 headline claimed: “Mortgage Rates Too High? Blame the Fed, Wall Street, and Your Neighbor”. Thus, home buyers and sellers panicked.
Now that 2023 is approaching, the Fed is now claiming that it’s only a real estate market “correction”. So, experts are now predicting falling home prices in 2023.
This is where Buffet’s second prediction of “greedy when others are fearful” comes into play. Fearful investors present good value investment opportunities.
As the housing market cools into 2023 expect prices to fall. A perfect time to invest in rental homes.
For the past two consecutive months, home values fell. A recent Freddie Mac survey predicts home prices to decline in 2023. That’s because rising mortgage rates force home buyers to pay higher interest rates leaving them with a lower budget to buy a home.
Redfin recently claimed that due to the rising interest rates, a typical monthly mortgage payment for a new home rose 45% over the same time last year. This resulted in fewer home sales and fewer new listings as sellers fear losing their equity on a sale.
2. Timing Is Important for Housing Investors
The housing market will cool slowly as home sellers who listed when prices were high won’t feel the sting until their listings don’t sell. Usually, it takes a few months for sellers to realize their home won’t sell at the asking price and must lower it.
Tip: This is how the Fed cooling correction will work. When sellers realize they can’t sell their homes prices will fall. Then, homes will become more affordable to buyers.
This is the time to buy. After all, as an old saying states: “Buy low and sell high”.
In 2023, when the time is right as home prices fall is when you should invest.
3. Why Investing in Housing Rentals Is Profitable
Don’t invest in house flipping where you buy a home, fix it up and quickly sell it. Your profits will shrink by paying higher taxes. That’s because the IRS and federal tax laws make flippers pay more. Why? It’s because they are not active real estate investors who get more deductions and pay a lower tax rate.
Instead, become what the IRS classifies as active real estate investors. You accomplish that by holding onto your housing investments and renting them out to get even more tax deductions.
Read about the many tax benefits you will get if you actively rent houses in our article: “How to Make Millions with Rental Properties”.
Cash flow is King! You will appreciate the monthly cash from rental payments that add up to annual profits and more money in the bank. This is what long-term active investments are all about. Besides greater tax benefits you get extra cash in the bank.
Another tax benefit is the ability to sell your rentals and use the proceeds to buy more investment properties and Pay No Taxes. The IRS calls it a1031 Like-Kind Exchange because it’s not a taxable sale, but rather an “exchange” of rental properties sold and replaced by other investment real properties.
Learn more about the benefits of a 1031 Like-Kind Tax-Deferred Exchange. Read this informative article explaining the many benefits of this tax-saving law: “How to Profit Using 1031 Exchanges”.
4. How to Profit with Housing Rentals
Books and long guides explain the ins and outs of housing rentals profits. We can’t explain all the calculations, tax benefits, and principles of housing investments here.
Yet, we can point you to past articles here that will help you to understand many of these important principles:
- How To Get Better Real Estate Deals (Tips From The Pros);
- How to Invest in Rental Property with Little Money; and
- Rental Investors Share Secrets.
5. How Do You Calculate Your Rental Profits?
Instead of confusing you with mathematical formulas, we also published helpful articles here like:
How to Quickly Calculate Your Profits
Check out this Free online Rental Property Calculator which shows you how to analyze rental property deals. It will:
- Estimate the monthly and annual cash flow;
- Determine the profitability of a potential rental property;
- Calculate your Return On Investment (ROI) over time;
- Plan for unforeseen expenses; and
- Create a printable PDF for you to show partners and lenders.
6. Responsibility of a Landlord
A landlord means taking on tasks and responsibilities like:
- Getting a rental ready for tenants requires cleaning up and making the unit or home safe;
- Advertising vacancies requiring catchy ad headlines in correct media and online platforms;
- Finding and screening tenants to avoid renting to bad ones and finding good ones who will pay promptly and take care of your property;
- Dealing with maintenance and repairs including tenant emergencies 24/7; and
- Administrative work including bookkeeping, budgeting, collecting rent, filing taxes, paying bills, and other financial tasks.
Seems like too much work?
7. Hire a Professional Property Management Company
WeLease Property Management Company serves the greater San Diego area. We take all the fuss and hassles of a landlord off your hands. We do it all for you like the 5 tasks listed above.
Contact us to learn how our professional staff can ease you from a stressed landlord to a rental property owner who enjoys life while profiting from our services.
How to Invest During the Housing Correction – Conclusion
As you read, there are good ways to invest during the housing correction in 2023.
Take advantage of the current housing market cooling correction. Invest in single-family homes, condos, or townhouses when prices fall in 2023.
Prepare now for 2023 by contacting us at WeLease to learn about the current housing rental market and what to expect in 2023.
If You Want to Invest in Housing in San Diego County
Contact us today to get a jump now to prepare for the 2023 housing price decline by putting together the knowledge and team needed for profitable housing investments.
Steven Rich, MBA – Guest Blogger
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