Last Updated on February 9, 2021
Retirement savings have taken a big hit since the Covid-19 pandemic started. Anyone who has checked his or her 401(k) or IRA balance already knows this. The markets have seemed to have stabilized, but nowhere near the levels they were at pre-financial crisis. Is now the time to start investing in real estate? It definitely should be considered. Please note, this article is for educational purposes. IRA Financial does not offer investment advice. You should speak with a financial advisor before making any investments.
- Covid-19 has changed life as we know it
- Investing in real estate helps diversify your portfolio
- A Self-Directed IRA is a tax-advantageous way to invest in real estate
The Covid-19 Effect
As of this writing, there have been over 675,000 confirmed cases and nearly 35,000 deaths in the US alone due to the coronavirus. A large portion of the 330,000,000 people living in the US are at home right now. Only essential businesses are allowed to operate. More than 22 million people have filed for unemployment. The Dow Jones is sitting at just under 24,000, but that’s still about 6,000 points below it’s all-time high of 29,951on February 12, 2020. As a result, those invested strictly in traditional investments have lost a ton of money. Stocks are down across the board.
While the President has plans to try to open the country for business in a timely fashion, it remains to be seen when that will happen. For now, staying at home, social distancing and wearing protective masks in public is necessary. No one knows when normalcy will return. We are all in the same boat in uncharted waters. Everyone needs to do his or her part to minimize the casualties of this disease.
Real Estate Impacts
With social distancing continuing for the foreseeable future, more people will be shuttered in their homes. Housing is more important than ever. With bars and restaurants closed and travel shunted, more people have cash on hand. At least those that are still employed. Wives throughout the country have long “Honey-Do” lists. With nothing else to do, improvements can be made to current houses. Thus, driving up the value of your home. Even if you aren’t looking at selling, that’s great for your future.
More so, many people may consider moving from an apartment to a starter home. Some may even look to find their forever home. Another thing that may happen is people looking to move from urban areas. These densely populated cities have been hot spots for Covid-19. Just look at New York City. After 9/11, a similar exodus occurred. However, people have flocked back there in recent years. Again, the total impact may not be known for some time.
Of course, real estate prices have been affected by the financial crisis. According to a recent Fannie Mae survey, home sales will decline, but prices are expected to rise from last year. Further, they expect 2021 to rebound nicely. Of course, this will depend on when the pandemic is over. Investing in real estate may be the way to go right now.
Investing in Real Estate with Retirement Funds
Real estate investing has been the most popular alternative asset investment for retirement savers. However, not enough people know that you can use IRA and 401(k) funds to invest in anything other than stocks, bonds and mutual funds. This is because traditional financial institutions don’t generally offer alternative options. You need a specialized custodian or administrator, such as IRA Financial, to invest in what you want.
- Invest in what you know
- Hard assets
Those are the three main points to consider when choosing alternative investments. First, not everyone knows exactly what they’re doing with their money in the stock market. However, real estate is so popular, because anyone can understand it. A little bit of research can help you find the perfect property in the best neighborhood that will give the best returns.
Next, diversifying your holdings is one of the most important things you can do. As many know, investing everything in the stock market can have serious consequences. Real Estate allows you to properly diversify your retirement assets. Generally, during times of volatility, real estate will retain more value.
Lastly, invest in hard assets. Hard assets are something you can see and touch. You can’t touch your stocks. Most transactions are done on a screen. However, you can drive by your property or even walk inside and feel it. This gives many people a sense of security when it comes to their retirement investments.
How to Invest in Real Estate
For most people, the only way to invest retirement funds in real estate is with a Self-Directed IRA. By self-directing your plan, you can choose what investments to make and when to make them. As we mentioned earlier, you need the right custodian to do so. IRA Financial Trust allows for checkbook control of your funds. When you find an investment, all you need to do is write a check. You never need to ask for custodial consent, or permission, to invest your money.
The best part of investing in real estate with a Self-Directed IRA is no taxes are due on an annual basis. All income generated by the property flow back into the IRA tax-free. In the case of a traditional plan, taxes are due when you withdraw from the plan. On the other hand, investments within a Roth IRA generate tax-free gains when withdrawn after age 59 1/2. Therefore, it’s very tax-advantageous to use retirement funds for real estate investing.
If you make an investment with non-retirement funds (i.e. a regular checking account), all income from a property will be taxed on your annual return. When you use a Self-Directed IRA for real estate investing, all income and gains are tax deferred. For example, if you invest in a rental property that generates $10,000 per year, you don’t pay taxes until you make a distribution from the account. It’s important to note that distributions before age 59 1/2 may be subject to the 10% early withdrawal penalty.
With everything going on in the world today, you might not be thinking about your financial future. This is totally understandable. But it doesn’t hurt to start planning ahead. Properly diversifying your assets is important at all times, but even more so during financial crises. You must pay attention to the IRS rules and guidelines when it comes to alternative investments. By working with self-directed retirement experts, you will ensure your IRA remains IRS-compliant.
IRA Financial is with you every step of the way. You can call us at 800-472-0646 anytime and speak to one of our experts to see if the Self-Directed IRA fits with your retirement goals. You can also subscribe to our YouTube channel for loads of easy-to-understand videos explaining all aspects of the plan.