Rising interest rates can be both a boon and a burden for real estate investors. On the positive side, higher rates translate to higher rents, which can boost investor profits. But higher rates can also make it harder to find good deals in the real estate market.
“In 2023, no matter what you think or see, the real estate market climate still offers a favorable landscape for investors, if you can gut out the opportunities properly,” says Sal Dimiceli Sr., owner of Lake Geneva Area Realty, a real estate broker in Lake Geneva, Wisconsin. “With an average monthly (home) appreciation rate of 2% and yearly growth of 14.5%, long-term appreciation remains robust.”
While mortgage rates are anticipated to decline, he says housing remains competitive due to low supply.
“The market presents an opportune time for equity-building, as the absence of an imminent housing bubble collapse and rising average monthly rents contribute to a promising investment landscape,” he says.
Here’s what you need to know about which places offer the best real estate investment properties in 2023:
— Residential properties in lower- and middle-income areas.
— Areas with growing populations.
— Places you’re familiar with.
Residential Properties in Lower- and Middle-Income Areas
A decline in real estate market participation by major institutional investors is making way for local individual investors to step in, says Kurt Carlton, co-founder and president of New Western, a private marketplace for residential investment properties in the U.S.
Individual real estate investors have an opportunity to target niche markets where they can refurbish existing homes and fill a need for starter homes that he says are in high demand. The best places to do this are lower- and middle-income areas where you can find accessible price points for a renovation project.
“This makes them an attractive option for the lower- to middle-income buyer, which currently faces a shortage,” he says.
Around 320,000 homes valued up to $256,000 are needed to meet the needs of home buyers, according to a recent National Association of Realtors analysis.
Look for cities with a lot of older homes primed for substantial renovations plus a robust demand for cost-effective housing. “Instead of just buying for long-term appreciation, look for homes that, with strategic renovations, can be immediately elevated in value,” he says. “In essence, wins in real estate often come from hands-on value creation as well as long-term speculation.”
Based on New Western investor behavior data, the cities with high investor engagement include Boston; Houston, Texas; Charlotte, North Carolina; Jacksonville, Florida; and Washington D.C., he says.
Areas with Growing Populations
The key to successful real estate investing is often following demand. Where populations grow, demand follows. Areas such as Las Vegas, Nevada, and Madison, Wisconsin, present prime opportunities thanks to their growing populations.
“While many people picture Las Vegas as a perfect tourist destination, it is also a prime location to invest in real estate properties,” says David Tully, a Realtor at eXp Realty in Reno, Nevada. “Las Vegas has a strong economy and a growing population that drives high demand for rental properties.”
Las Vegas also has a strong job market thanks to the tourism, gaming, construction and technology industries in the area. “You can also enjoy comparatively lower housing prices and cost of living here, which make it even more attractive for people who are looking for a reasonable place to invest in,” Tully says. Not to mention, an “excellent return on vacation rental investments.”
Madison also boasts an above-average population growth rate, Dimiceli says. This, coupled with a 1.4% annual rental rate increase in an area that already has a 22% higher median rental price relative to the rest of the state, makes it a “competitive yet promising” market, he says.
Places You’re Familiar With
Before you jump into an unfamiliar pond because the population growth looks promising, consider that every real estate market is unique.
“The market dynamics and standards can be very different in each location, with no similarities sometimes,” says Dino DiNenna, a Realtor with Southern Lifestyle Properties in Hilton Head Island, South Carolina. “So it’s better to start in a market where you have knowledge rather than using what you’ve learned in a growing real estate region in another one.”
He gives the example of how population demographics weigh on buyer behavior toward available homes. “Lower employment rates would mean a slow rise in home prices, but a high population would mean a shortage in supply leading to housing bubbles.”
Similarly, it’s important to know the difference between a housing bubble and increasing urban development in an area. “A housing bubble happens when a speed-up movement in spending and demand causes the prices to suddenly inflate quickly,” he says. “But in a metro city or urbanized location, this is a normal trend because the population has improved lifestyle, and the natural value of base resources like land is growing.”
Real estate investing can be a rewarding long-term investment. Despite challenging market conditions, there are real estate investment opportunities in residential properties in lower- and middle-income areas and places with strong population growth in 2023. However, it’s important to familiarize yourself with an area and its unique characteristics before jumping in.
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Update 08/21/23: This story was previously published at an earlier date and has been updated with new information.