Recently, President Trump called for a 0% interest rate citing that “increased borrowing costs will put the breaks on economic growth.” Now, whether it’s a good idea or not is up to the pundits to discuss. However, a 0% interest rate will make alternative investments even more appealing. Retirement plans that allow alternate asset classes, specifically the Self-Directed IRA, might make an attractive savings vehicle even better.
What Does a 0% Interest Rate Mean?
Interest rates decide how much it costs to borrow money and also how much you get for saving it. Whether you have a credit card, a home loan or outstanding bills, the interest you pay is decided by the government. The higher the rates, the more it costs to borrow money. On the flip side, higher rates also mean high returns for your savings account. When you save money with a bank, they pay you for the use of your money. As rates fall, so does the interest you receive from a bank. However, falling rates make it more affordable to borrow money.
President Trump argues that a 0% interest rate will help spur the economy. Afterall, the easier it is to borrow money, the more people are apt to spend. Dissenters say that a zero (or even negative) interest rate could spur inflation and lead to economic turmoil and even a recession.
The Fed Funds Rate is the most important interest rate to pay attention too. Most rates are based on this number. For example, the Prime Rate is generally 3% higher than the Fed Funds Rate. This rate is used for those who are worthy of the best rates. It also determines how much credit card companies can charge you in interest and how good a rate you can get when you purchase a house.
What is a Self-Directed IRA?
Essentially, a Self-Directed IRA is a traditional Individual Retirement Account (IRA) that allows for alternative investments. When you open one at the right custodian, such as IRA Financial, you have total control of your retirement funds. You can use your Self-Directed IRA to invest in anything that the IRS doesn’t deem a prohibited transaction. Basically, you can’t use an IRA to invest in life insurance, collectibles or an investment involving a disqualified person.
The most popular alternative investment is real estate. Everyone needs a place to live and work, so real estate does well at maintaining its value. Even during market crashes, you know that the housing market will return to glory.
Other types of alternative investments include tax liens, precious metals, hard money loans, small businesses and cryptocurrencies. If you do your homework, alternative investments can far outpace the gains that can be made from traditional assets, such as stocks and bonds.
What Does a 0% Interest Rate Mean for a Self-Directed IRA?
We’ve talked about interest rates and Self-Directed IRAs. Now, let’s put them together and discuss what a 0% interest rate will mean for your IRA. When it’s cheaper to borrow and/or lend money, it make for a better investment. Standard IRAs only allow for traditional investments. Since a Self-Directed IRA does not limit what you can invest in, they are always the better choice. A 0% interest rate would allow you to see better returns on your assets.
Here, we’ll focus on two popular investments you can make with a Self-Directed IRA – real estate and hard money loans. These choices exemplify how the interest rate affects your investment choices.
The old adage rings true with real estate – Buy Low Sell High. There’s a lot of factors that determine if it’s a buyer’s or seller’s market. A 0% interest rate could certainly help out both sides. The lower the rate, the more people are apt to purchase real estate. As buyers snatch up properties, diminishing the inventory, the more sellers can list a property for.
If you are a real estate investor, a 0% interest rate is very attractive. Not only does it bring down the cost of a property, but it also expands the inventory available to you. You can choose to invest in a rental property and enjoy passive income for years to come or go with a flip house that will let you see a quick profit.
Further, with low rates, you may be able to afford several properties at once. Not only is it important to diversify your assets, but when it comes to real estate, it’s best to spread your properties across many markets. Therefore, if one market starts to slow, you have other properties to make up the difference.
Hard Money Loans
Hard money loans, also known as peer-to-peer lending, is another investment that will benefit from a 0% interest rate. You may not know, but you can use your Self-Directed IRA funds as a way to loan money. Instead of going to a bank (and dealing with the arduous process), one can come to you for a loan. The great thing is that you get to decide the interest rate.
For example, maybe you have a friend looking to make a large purchase, but needs a bit more capital. If it’s someone you trust, you can loan money from your IRA at a reasonable rate with a payment plan that works for both of you. Not only do you help out a friend, you can make money off the borrowed funds.
It’s certainly not a foregone conclusion that a 0% interest rate is coming in the near future. However, it is an interesting thought by the President that could spur the economy and be a bonus for Self-Directed IRA investors.
If you have thoughts or questions about the proposed rate change, feel free to contact us @ 800.472.0646 today! Please note that this article is for educational purposes. Always due your own due diligence and talk with a financial planner before deciding what to invest in.