Real estate has proven to be a great investment in many economic environments. However, 2022 has been a challenging year for real estate investors because of a weakened economy and high interest rates.
Despite the challenges, investing in real estate is still an excellent way to diversify your income. Here are some strategies for successful real estate investing in 2023.
1. Invest in Real Estate Investment Trusts (REITs)
Real estate investment trusts (REITs) offer a way to invest in the real estate market without the hassle of owning and maintaining property. REITs are publicly traded companies that own and operate properties that generate rent and dividend income. They have long-term track records of consistent performance and low correlations to stocks and bonds.
REITs pay no taxes at the corporate level, which allows them to finance properties more cheaply than non-REIT companies and earn higher profit margins that they then disburse to investors as dividends. Historically, REITs have outperformed both private real estate and the broader stock market during economic slowdowns and recessions.
As you research REITs, look for one that has a high dividend distribution ratio and a history of increasing its dividends over time. Also look at the company’s business strategy and portfolio to determine if it is diversified enough. REITs that specialize in shopping malls, for example, could be vulnerable to a decline in foot traffic.
2. Invest in Flipping Homes
Real estate can be a solid wealth-accumulating investment over the long term. However, you should have a clear strategy in mind. Figure out whether you want to flip homes, buy and hold rental properties or get involved in wholesaling. Decide how you will finance your deals and how you’ll approach the market.
Purchasing and rehabbing property takes time and energy. This can bite into your nights and weekends. Finding buyers and completing the sale can also take up a significant amount of your time. If you’re not prepared for this level of commitment, then house flipping might not be the right investing strategy for you.
Investors with a longer-term view can invest in long-term rental properties in areas with booming population growth and positive economic trends. Renters are always in demand, and stable rental income can help investors weather downturns and recessions. This is a proven strategy that’s less risky than other investments, like stocks and bonds.
3. Invest in Rental Properties
The last year has been challenging for many real estate investors. Rising mortgage rates, soaring home prices and high inflation have made it difficult for investors to find good deals that will make them money.
If you’re looking for a passive investment strategy, renting out property can provide you with an income stream. However, it’s important to be aware of the potential risks involved, such as vacancies and unexpected expenses.
For novice investors, a rental property might be too much of a commitment. But, if you’re committed to the long-term, investing in rental properties can be a great way to build wealth and diversify your portfolio. One popular strategy is to purchase a single-family home and rent it out. You can also invest in multi-unit buildings, like duplexes or triplexes, to maximize your income. According to BiggerPockets, a real estate investment forum, another option is called house hacking, which allows you to rent out rooms in your own home.
4. Diversify Your Holdings
Real estate investing offers a variety of benefits that are appealing to investors of all experience levels. However, if you’re planning to make real estate a large part of your investment portfolio, it’s important to diversify your holdings.
Diversification of real estate investments can help reduce risk and maximize returns. Whether you’re flipping homes or buying and holding long-term rental properties, it’s important to diversify your property types and geographic locations. This will ensure that if one type of property experiences a slowdown, it won’t have a devastating impact on your overall portfolio.
For example, if you’re invested in only residential properties, and home prices drop significantly, your entire portfolio could suffer. To diversify your holdings, you can purchase multifamily properties, retail space or self-storage units. In addition, you can invest in properties in previously overlooked markets that are predicted to grow over the next decade. This strategy can also improve your returns by lowering your overall investment costs.