Investors are typically attracted to investments they have been successful with in the past. Investors who do not have much experience who are investing their own money tend to look for opportunities that are simpler than an acquisition of an entire business; this investment often comes in the form of real estate. Real estate is a great investment for a number of reasons. In our past retirement articles we have outlined a few of the major points investors are attracted to real estate in this current market:
- Rentals vs. Bonds: The bond market was a great investment to be in when the stock market initially crashed in 2008; however, now that interest rates have decreased to an all time low, that is another story. Once the stock market picks back up interest rates will increase and cause the value of a bond portfolio to decrease dramatically. This is due to the inverse relationship between bond value and interest rates. When the market picks back up you can expect to see the value of a real estate property increase. As inflation kicks off the returns from the rentals will rise accordingly. This protects against the two aspects that the leave many investors apprehensive toward buying bonds.
- Protection Against Inflation: Inflation is notorious for helping those who are in debt because their value of their debt decreases, and hurting those who own debt for the same reason. It also hurts those who have their assets in cash because the savings account can decrease in value to the point of becoming nearly worthless in times of hyperinflation. Real estate, as was mentioned in the “Rentals vs. Bonds” section, increases in value as the inflation increases. It also has a tendency to increase in rents as inflation increases as well—depending on the length of the lease contract.
- Personal Management: The self directed IRA allows you to personally manage the account and invest in the deal you believe to be the most profitable. This is much better than leaving that responsibility to some person you have not ever met in some office who is dealing with billions of dollars across thousands of accounts.
These are just a few reasons why investors are looking to invest in real estate, whether they are in a strong financial position or just starting with their retirement building process.
Many have the financial assets to make all cash offers on various condos, houses, and apartment complexes that make their offers particularly attractive to a bank that has to foreclose or short sale a property. These offers make it particularly difficult for those who do not have hundreds of thousands, or even millions of dollars in the bank to compete. So how can the guys that are starting out become competitive in investing in these opportunities? Here are a few pointers to help you get started:
- Utilize Leverage: If you have enough money to invest about 20% of the value of the property you may have enough to get a loan. The beautiful thing about taking out a loan to buy your investment property is that you can keep all of the equity in the property. That way your income from the rents increases dramatically the day you pay off the loan. Now, it is important to recognize that there is a lot of risk in taking out a loan. If you default and eventually foreclose on the loan you may be left without a property or the down payment you put up when buying the property. Our recommendation is that you build slowly. If you buy one property first, then pay off the loan, and then pick up another one or two properties then you can ensure you always have enough income to make the monthly payments even if they are vacant for a time. Learn to mitigate your risk.
- Sacrifice Equity: There are many people who would like to begin investing in real estate. In fact, if I had to wager which investment is one that most people would like to get involved in I would bet on real estate. Whether it is land for development, short sales to flip and make a profit, or condos and apartment building for rental income many people want to get into real estate. This presents the opportunity for the little guy that is just getting started and the investor who has built up a great deal of wealth to connect. Start talking to your friends or family and pull together enough committed capital to make a deal. Perhaps you can structure the deal so you get 10% or 20% of the equity for managing the deal and the investors get the remaining capital. However you structure the deal there is money to be made.
- Self-Directed IRAs: You may have more money to invest in real estate than you think. Self-directed IRAs, commonly known as real estate IRAs or checkbook IRAs, are a unique tool designed to give the account holder the keys to drive. This account lets you decide, with some restrictions, what investments you will pursue and even write the check and close the deal. So if you have wealth accumulated in a 401(k) or a similar account from that previous job you had here are some of your options:
- Rollovers: You can roll the funds from multiple different retirement accounts into a self-directed IRA. This allows you to consolidate those accounts into one account and begin investing how you want.
- Transfers: Or if you have an IRA that is being managed by an account manager you can transfer those funds into a self-directed account and start moving forward.
These are a few points that we have seen work for investors whether they have already accumulated a great deal of wealth or are looking for their own first investments. If you have the time to invest in looking for the opportunities or the money to start placing into opportunities it is time to start moving forward. Contact your friends and family and make the connections that will start driving results.
If you need to make your rollover or transfer so you can start benefiting from the tax advantaged IRAs contact our professionals at SilverStone to start moving forward.