The Rental Property Playbook for 2023: Cash Flow in a Cooling Market

The rental market in 2023 is finally rewarding the same boring fundamentals that rewarded investors for the forty years before the pandemic. Cash flow matters again. Expense ratios matter again. Vacancy rates matter again. The investors who made their name in 2020 and 2021 by flipping Airbnbs and betting on appreciation are, many of them, quietly selling in 2023. The ones who bought steady long-term rentals in solid neighborhoods are mostly fine.

This post is a plain-English playbook for beginning landlords in the current environment. It is deliberately unsexy. It will not make you rich in six months. It will, if you follow it, start compounding your net worth reliably for the next twenty years, which is worth significantly more than most of what gets published in real estate media right now.

The simplest rule for buying a rental in 2023: the property has to pay you every month after every expense, including the ones first-time investors usually forget. Not just the mortgage and the insurance and the taxes. Also the property management fee (whether or not you hire one — pay yourself at least ten percent), the vacancy allowance (at least five percent), the maintenance reserve (another five percent), and the capital-expenditure reserve (another five percent) for the roof, HVAC, and appliances you will replace eventually.

If the property still cash-flows a hundred dollars per month after all of that, you have found a real rental. If it does not, you have found a property that will quietly eat your savings while its owner tells themselves they are an investor. Run the full number. Most beginning investors do not, and most beginning investors are disappointed.

Five rules for buying a rental this year:

1. Buy below median price for the area. The middle of the market is where the most competition lives. One notch below median — not the cheapest, but the affordable-and-desirable tier — is where the best rental economics hide. Tenants in that bracket are abundant, stable, and willing to stay for years if the property is well maintained.
2. Single-family or small multifamily beats large multifamily for beginners. Your first rental should be something you can manage yourself, understand fully, and sell easily if you need to. Four-plexes and above are operationally more complex than they look, and the financing gets commercial rather than residential once you go above four units.
3. Location beats renovation. A mediocre house in a great neighborhood outperforms a beautiful house in a mediocre neighborhood, every time, across every market we have ever seen. Buy the neighborhood first, then the house. You can always renovate the house. You cannot move it.
4. Stress-test the deal against a six percent vacancy rate and a ten percent rent reduction. If it still cash-flows, you have a durable asset. If it only works when the property is rented at peak rent with no turnover, you have a property that will punish you the first time reality shows up. Reality always shows up.
5. Plan to hold for at least ten years from day one. Transaction costs on real estate are brutal. Buying and selling within three years often wipes out most of the returns you thought you were generating. If you are buying a rental, buy it with the intention of holding through the next full cycle — two or three of them, ideally.

The best rental we ever helped a client buy was a modest three-bedroom single-family home in a quiet school district, purchased in 2013 for $142,000, generating $1,500 a month in rent then and $2,100 a month now. The mortgage is halfway paid down. The property is worth roughly $290,000 today. The total cash-on-cash return, factoring in cash flow, paydown, and appreciation, is somewhere north of 18 percent annualized. There is nothing exotic about this deal. It is just what happens when you buy right, hold patiently, and let time do what time does.

The 2023 rental market rewards that exact pattern more than almost any market since 2011. You can buy below median price in many neighborhoods right now. You can lock in tenants for a year or two at current rents. And you can ride out whatever the next twelve months bring without losing sleep, because your numbers work even if rates stay elevated and appreciation stalls.

If you are deciding between buying a rental this year and waiting for “better conditions,” remember that the investors who bought in every year of the last forty — including the hard years — are the ones with the portfolios you want. The ones who waited for conditions to be perfect are the ones still waiting.

Cash flow is what keeps you in the game long enough for the other pieces to compound.