The last few years have been quite a ride for the real estate investment market. Historically low-interest rates, skyrocketing rents, and huge appreciation gains have seen most homeowners fare very well in recent years. But was this another housing bubble? With rising interest rates, high inflation, and constant speculation of a recession — is rental property still a good investment in 2023?
To find out the potential risks and rewards of the rental market in 2023, Belong has compiled research and analysis on the current rental property market from a variety of sources. These include Investopedia, Roofstock, Zillow, NerdWallet, Redfin, Thumbtack, Forbes Advisor, CBS News, and Belong’s own internal insights. The research took place in June 2023 and is subject to change. This article can aid research but should not be considered financial advice.
What are the potential rewards in the real estate market in 2023?
The U.S. doesn’t have one ‘housing market’, but rather many housing markets within every locality. A good buy in Seattle isn’t the same as a good buy in Sacramento. Some cities have consistent demand, others will go through fluctuations based on supply and demand.
So is buying a new investment property a good idea in 2023? The answer will always depend on your personal situation and the properties you’re considering. That said, here is a list of 6 potential rewards or ‘pros’ of investing in the real estate market in 2023.
1. Single-family homes are less volatile than the stock market
According to data from Roofstock, average annual returns on single-family homes in the rental market are comparable to stock market returns and outperform bond returns, but with considerably less volatility. They also report that there’s no correlation between single-family homes and the stock market as an investment, meaning that real estate can be a good way to diversify a portfolio.
2. Rental homes can hedge against inflation
When inflation rises, so do rents. Real estate investments are often described as a “hedge against inflation.” This is because with a fixed-rate mortgage, interest payments will stay the same but your rental income can increase over time. You’ll also be building equity in the home and can benefit from inflation and appreciation long-term.
3. Property values have a history of increasing after economic downturns
Housing appreciation has skyrocketed in recent years, with double-digit gains on the value of most homes. Of course, there’s always the risk of an economic downturn that could change that quickly. Thankfully, property values have a history of bouncing back and increasing after economic downturns. That means if you’re investing for the long term, you can expect the value of your property to rise over time — even if there’s a risk of values declining in the short term.
4. Low affordability is keeping people renting for longer
Even as house prices slow across many markets, they’re far from affordable for many Americans. Forbes Advisor predicts that housing affordability will remain low in 2023, thanks to tight inventory, high mortgage rates, and price growth. People will always need a place to live and as fewer Americans are able to buy their own homes, good rental investments in the right neighborhoods can continue to attract long-term residents with low vacancy rates.
5. Rental expenses come with tax write-offs and benefits
Tax write-offs are a major perk of owning a rental property. The IRS outlines rental expenses you may be able to deduct on your tax return including mortgage interest, property tax, and operating expenses including property management fees, depreciation, and repairs. You can even deduct the cost of hiring an accountant or tax professional to maximize your claim.
6. Real estate investments provide an opportunity to learn and scale
Real estate investing requires careful planning, knowledge, and a lot of hard work to achieve passive income. Acquiring and managing your first property involves an initial learning curve, but you’ll quickly learn what works for your personal financial goals. Once you work out the kinks, you can apply this knowledge (and the equity building in the first home) to recognize good investments, find good tenants, increase your rental returns, and even build your portfolio.
