Is Stability Finally In Sight for the Long-Term Rental Market in 2023?
As a real estate investor, you’re probably wondering what the landscape will look like for the rest of 2023. Well, we’ve got some good news for you.
Assuming nothing crazy happens (fingers crossed), buy-and-hold real estate investors should, after years of extreme volatility, have a relatively stable landscape to navigate in 2023. Of course, that doesn't mean we'll be back to business as usual pre-pandemic or even this time last year. But that's not necessarily a bad thing.
See, the past year has definitely left its mark on long-term residential rental financing options, so there's no denying that. However, investors who wait too long for perfect conditions may miss out on some good opportunities. In other words, sometimes it's better to jump in when things look pretty good instead of waiting to be perfect.
Long story short, stability will be a welcome change for real estate investors in 2023. When you're buying a long-term rental property, you need to be able to calculate when it's the right time to take the bull by the horns, or you could regret it later.
Predictability is key, and after a few years of volatility, it's looking like we might finally get some regularity in the market in 2023. Inflation should start to moderate, interest rate hikes will likely slow down, and home prices are expected to stabilize. All of these factors combined should make for a good environment for rental properties.
Residential rental financing options in 2023
If you're a buy-and-hold investor or considering investing in rental properties, you should know a few things about financing. When it comes to financing rental properties, you've got two main options: traditional bank loans or creative financing. Which one you choose depends on what you're trying to achieve.
Basically, when you're looking to buy a primary residence for yourself, you’d turn to a conforming mortgage. But when you're buying a property with the intention of renting it out, you'll likely need a non-conforming (non-QM) investment property loan.
Why? Well, the main difference between a conforming mortgage for your primary residence and securing a rental investment loan is that lenders see the latter as riskier. That’s why investment property loans carry higher interest rates and fees, higher down payments and sometimes stricter qualifying requirements than traditional mortgages.
If you're investing in an area where things are moving slowly and you're not in a rush to build up a portfolio of properties, a traditional loan from a bank might work for you. But if you're trying to grow your business quickly, or time is of the essence, you might need a more flexible and fast solution from the other financing options, like a DSCR rental loan from a private money lender.
The thing is, traditional bank loans are less attractive – and harder to get – in a high-interest-rate environment like the one we are likely to see this year. That's because those bank loans are often backed by mortgage-backed securities (MBS), which investors may not want to buy when rates are high.
This can force banks to hold onto more mortgages, which means they have less money to lend. So they might charge higher interest rates, raise fees, or make it harder to qualify for their loans. While interest rates get all the glory as the Federal Reserve’s primary weapon against inflation, these MBS have also played an important role.
Taking stock as the dust settles
There's been a lot of talk about inflation going wild in the past year. The Federal Reserve, in response to the economic fallout from the pandemic, took steps to keep the economy from totally crashing. These measures included not only cutting the federal funds rate to near zero and increasing lending but also purchasing large amounts of MBS (mortgage-backed securities).
In fact, Federal Reserve increased its holdings of MBS by $900 billion from March 2020 to June 2021. This, along with the $5 trillion of federal stimulus money that was pumped into the broader economy, set the stage for rampant inflation. In just one year – May 2020 to May 2021 – the inflation rate went up by almost 5,000%! It peaked at 9.1% in mid-2022, but by January of this year, it had gone down to 6.4%. That's better, but still more than three times higher than the average rate in 2019.
While most people give credit to the Federal Reserve for controlling inflation by playing with interest rates, their actions with MBS holdings have also had a big impact on the real estate loan market. In September 2022, the Fed stopped buying MBS, with the goal of reducing the amount of MBS they held on their balance sheets to zero.
High interest rates were already making it difficult to find buyers for MBS — making things even harder for people looking for real estate loans. By taking liquidity out of the traditional mortgage market, the Fed made it more challenging for banks and mortgage brokers to lend money for rental properties.
Outlook for investment property loans in 2023
So, the average rate on a 30-year fixed-rate loan has gone down a bit recently, from 7.08% in November 2022 to 6.32% in February 2023. But even with lower rates, it's still hard to get financing right now. The Mortgage Bankers Association says it's because there aren't as many loans available as there used to be, with credit availability at its lowest level since 2013.
And it doesn't look like rates are going to drop anytime soon. The Federal Reserve has indicated that it has no intention of pausing rate hikes until inflation is about half of what it is now. The earliest that could happen is the middle of this year, but most people think it’s unlikely to happen until early 2024.
So, real estate investors might have an easier time finding properties to buy because there won't be as many buyers. But fix and flip investors who want to sell their property might wait until rates go back down and they can get a better price.
So, for those who are investing in real estate, there's some good news and some bad news. On the positive side, since many buyers might hold off on buying properties due to high mortgage rates, there may be less competition for the available properties.
But on the downside, sellers who got really low mortgage rates in the past few years may not want to sell their properties now because they don't want to lose out on low rates. So, they might hold off selling until rates come down and demand, and prices, go up again.
The tiebreaker: Renters are flooding the market
The US is in a bit of a pickle when it comes to housing. The U.S. faces a housing shortage, with multiple studies pegging the deficit at 3.8 million units. We don't have enough houses for everyone who wants to live in big cities like New York, Los Angeles, and San Francisco. In fact, only one new home is being built for every twenty jobs created in these places.
That scarcity is driving up the rents. Median rents are expected to rise 6.3% this year, which is one of the reasons why home prices remain frothy despite all the headwinds. 
Plus, there’s a trend of big companies compelling their employees to return to the office, which means more people are returning to the big cities. This will make the rental property market even more competitive for real estate investors looking to grow their buy-and-hold portfolios over the next couple of years.
Don’t let perfection be the enemy of good
As a buy-and-hold investor, you should consider a few things in 2023. First, while loan rates are higher than they were a year ago, that doesn't necessarily mean it's a bad time to buy. In fact, lower rates in early 2022 drove up competition for available properties, driving sky-high valuations. However, while property values have fallen, the downturn is expected to be short-lived and modest – less than 10%. Investors should not be expecting a Great Recession-style collapse.
So, if you're interested in building a long-term residential rental portfolio, there’s no time like the present to take action. While competition is low right now, that won't last forever. As soon as people get wind of lower interest rates on the horizon, the market will heat up again. Especially in strong rental markets, waiting too long could mean missing out on a great investment opportunity. So, get your financing in order and start your search today!
1 Technology For You. “How Real Estate Investors Can Prepare for 2023 in 4 Easy Steps.” December 6, 2022.
2 Eric Milstein and David Wessel. “What Did the Fed Do in Response to the COVID-19 Crisis? Brookings, March 9, 2022.
3 Alicia Parlapiano, “Where $5 Trillion in Pandemic Stimulus Money Went” The New York Times. March 11, 2022.
4 US Inflation Calculator. “Historical Inflation Rates: 1914-2023.” US Inflation Calculator, April 1, 2023.
5 FRED, “30-Year Fixed Rate Mortgage Average in the United States,” FRED, March 30, 2023,
6 National Mortgage Professional, “Mortgage Credit Availability Dips in January,” February 9, 2023.
7 Lowrey, Annie. “The U.S. Needs More Housing than Almost Anyone Can Imagine.” Atlantic Media Company, December 15, 2022.
8 Brenda Richardson, “Experts Predict What the Housing Market Will Look like in 2023” Forbes. January 5, 2023.