It has been a heck of a few years in real estate investing.
From the run on home buying in 2020 to the consequently astronomical increases in home prices to a (hopefully) inflation-stymying rate hike that bumped up mortgage and lending rates, some investors are having a hard time seeing which way is up.
As 2022 was coming to a close, we wanted to know how real estate investors were faring through all of this — and what they thought was going to happen next. Therefore, we surveyed over 100 of the top fix-and-flip investors in the U.S. about their predictions for 2023. And while 83.3% of respondents said they expect to flip more or about the same number of homes this year, they admitted it wasn’t going to happen without some challenges.
Now as we’re settling into 2023, we decided to take a look at the predicted challenges and see if it still looks like these concerns are valid.
The answer is yes.
Finding Capital with Reasonable Interest Rates
The number one challenge survey respondents said they think they’ll face this year is not just finding capital, but finding it with interest rates that are within reason (24.5%).
Stoa’s head of acquisitions, Wayne Yamano, said that this prediction still seems to hold water. Jerome Powell, chair of the U.S. Federal Reserve, continues to signal future rate hikes, with inflation still well above their target of 2%. That means that there will continue to be upward pressure on both mortgage and hard money loan rates in the near term.
According to Wayne, an additional challenge real estate investors will face with capital is finding lenders who will give them enough leverage so that they don’t have to put as much cash into their projects.
“Even if an investor can find a lender with reasonable rates, the leverage they’re going to get is much lower today than they were able to get a year ago. That means they’ll have to put more of their own cash in, which will lead to fewer flips,” he said.
Sourcing the Right Properties
Of the investors we surveyed, 24% said the challenge they expect to face in 2023 is sourcing the right properties for their business. It looks like this will be the case for the time being.
The majority of people in homes right now are not willing sellers. For one thing, they’re seeing prices come down from the highs of last year, so some are worried about losing out on equity. For another, mortgage rates are higher than they were during COVID, so even though the rates are not at historic highs, people are still reluctant to sell and have to buy a home at a higher rate.
“What real estate investors typically rely on in a down cycle is some level of distress where people just have to sell either because they’re getting foreclosed on or they’ve lost their job, but we really haven’t seen that yet,” Wayne said.
While tighter mortgage underwriting has contributed to a lack of distress, one of the biggest factors is employment rates.
“If you look at the jobs report, it’s still pretty strong,” Wayne said. “We don’t have mass unemployment and people are still able to pay their mortgages, so that distress just hasn’t surfaced yet.”
Properties Sitting on the Market for Too Long
The third most selected concern for real estate investing in 2023 is having properties sit on the market, with 19.7% of investors agreeing.
This ties directly back to the last challenge, in that if the real estate investor is selling retail, people just aren’t moving or buying right now.
“There is softness in demand right now, so their exit is being challenged,” said Wayne. “Homes are going to sit on the market longer and prices will be under downward pressure.”
Additionally, the uncertainty in the housing market has many REITs and institutional investors holding onto their funds until there’s clear movement in either direction. That means a lot of the companies who were buying up single-family homes for SFRs are on hiatus as well.
Finishing Renovations on Time and on Budget
Tied for third, 19.7% of real estate investors we surveyed said they expect problems with having renovations finished on time and on budget.
This prediction tracks with the research we did for a recent article on why real estate investors aren’t scaling their businesses. The second most popular reason was that they couldn’t find enough contractors and subcontractors.
“The skilled labor shortage is one of the biggest challenges facing the U.S. economy, with 650,000 open jobs in the construction industry alone,” said Stanley Black & Decker CEO Jim Loree in a press release.
“I thought by now, with the volume of home building and flipping generally going down, that there’d be more labor availability,” said Wayne regarding the labor shortage. “It looks like that hasn’t actually manifested. I don’t know where those people are going, and maybe there is a little bit of relief in some regions, but I would have expected there to be more.”
Therefore, it looks like, for the time being at least, timely and on-budget renovations may be difficult to achieve for some investors.
Determining the Appropriate Scope of Work
While 3.9% of respondents had various “other” responses, the final investment challenge for 2023 according to fix-and-flip investors is determining the appropriate scope of work for renovations (8.2%).
One of the biggest issues here is figuring out the ROI on the renovations. Normally, real estate investors who are selling retail would just look at comparable properties in the neighborhood and renovate to those standards. However, current market conditions have made homebuyers even more picky because of current mortgage rates and asking prices.
“If you’re trying to sell a home retail and trying to match the taste of whatever buyer is going to come through the door, a part of that is just chance,” Wayne said. “In fact, it’s hard to predict a buyer’s preferences even if you know who your buyer is going to be.”
Overcoming These Challenges
While there will certainly be challenges for investors this year, there are still ways to succeed. This is especially true for those investors who stay the course while others drop out.
For example, though it may currently be difficult to find the right homes at the same volume as in years prior, savvy investors can use current market conditions to their advantage.
“Take advantage of the buyer’s market,” advised Wayne. “You can use your bargaining power to get a better deal on the homes you renovate.”
Additionally, as more real estate investors take a pause, tradespeople should have increased availability.
“While slow developing, trade availability should increase as flipping volume decreases and homebuilders reduce their volume,” said Wayne. “Reduce your turn times by taking advantage of that.”
What it boils down to is not pulling out even if it seems like everyone else is — especially when it seems like everyone else is. Those investors who are left standing will find themselves with less competition, meaning more available inventory, better prices, tradespeople looking for work, and more.
Despite all of the challenges, betting on yourself could pay off big.