With all that is going on in the world today, it’s still vitally important to look at your retirement savings. How are your investments doing? Where is the real estate market trending? What other investments can you make outside of Wall Street? Today, we will focus on the real estate market to see where you should be looking.

The Real Estate Market Right Now

Obviously, the COVID-19 pandemic has led to a decline across the real estate market since early March. As the calendar turns to June, it seems there’s been an increase in potential buyers. However, the supply of homes for sale hasn’t quite caught up.

The biggest trend experts are seeing is residential, suburban real estate. With so many people working from home, employers are starting to realize a 9-5 job doesn’t have to be contained by an office space. We think it’s safe to assume many employers make look at the reduced risk and cost associated by a physical location. What does this mean for the real estate market?

It appears more and more people will flock to the suburbs and less urban areas. If you work in a big city, the tendency has been to live within those city limits or a short distance away. This has always lead to increased prices (whether buying or renting) in those markets.

However, when you work from home, it doesn’t matter how far away your job is. Maybe you’ve always wanted small-town living, but you were tied to your office. A 90 minute daily commute to and from your job doesn’t appeal to most. What if you only had to hit the big city once or twice a month?

This is the mindset you should have as an investor. Finding the right property in the right area is the first step in a successful real estate investor. You must pay attention to the trends. As the trends change, so should your investment planning.

What About Rentals?

Those most affected by the financial crisis are those who have been unable to work. A healthy majority of those people are renters. Many investors who have rental properties are not seeing any rent at this time. Again, following the trends, it seems rental properties are slowing down. This is especially true of urban areas.

There are professionals who prefer to rent than to buy. Again, the distant suburbs may be where they flock to. The passive income generated by a rental is hard to pass up. Assuming the country gets back to normal in a reasonable time frame, rentals will become popular again. But, who knows how the real estate market will react? Will the demand ever go back up? Will the income be the same it was pre-coronavirus?

Those questions cannot be answered yet. Therefore, it’s unwise to jump into the real estate investing game haphazardly. It’s as important as ever to follow the trends in your neighborhoods to see if it will support rental income.

The Best Way to Invest in Real Estate

Bar none, investing in real estate with your retirement account is the best way to hold real estate. The tax advantages far outweigh the hoops you might have to jump through from the IRS. Using an IRA or 401(k) to invest in real estate comes with some restrictions. Most importantly, your plan can be the only thing that benefits from the investment. You, as the plan owner, your spouse, any lineal ascendants or descendants or business partners can’t personally benefit. These are considered disqualified persons.

This rule is part of the IRS’s prohibited transaction rules. They feel you are already getting the tax benefits by investing with a retirement plan. This is because taxes are deferred until you start withdrawing during retirement. The IRS sees no money while an asset is held in your IRA or 401(k).

The Self-Directed IRA

A Self-Directed IRA is just like any IRA you can open up at a local bank or favorite online provider. However, you have the freedom to invest in whatever you like and not limited to what a regular IRA allows. Of course, you must pay attention to the IRS rules. Running afoul of the IRS will lead to the disqualification of your plan (and the advantages it comes with).

A Self-Directed IRA is only as good as the company providing it. First, they must allow for real estate as an investment option. While more and more providers are allowing for them, it’s not always easy. Many large banks and IRA providers will still require permission to make a real estate investment. Not the best for time-sensitive investments.

WATCH THIS: Choosing the Right Self-Directed IRA

This is why you should choose a custodian, like IRA Financial, that offers checkbook control. This allows the investor to make a real estate investments as he or she sees fit. There’s never a need to ask for permission to use your IRA funds!

The one drawback of the Self-Directed IRA is the UBTI tax. Essentially, if you need to borrow money to make a purchase (to get a mortgage, for example), you will get hit with an extra tax. Therefore, it’s best to make a purchase with IRA funds only. If you need to borrow to get the perfect property, borrow as little as you need.

Solo 401(k)

The best option for real estate investing is the Solo 401(k). This is because there is an exemption for these plans from the UBTI tax. The big but is that you have to be self-employed to open a Solo 401(k). Further, if you own your own business, you can only open a Solo 401(k) if you have no full-time employees, other than a spouse.

This does limit the people who can go Solo. But if you do have self-employed income, either from an owner-only business or other sources (Uber driver, contracting work, Etsy store, etc.), the Solo 401(k) is the best retirement plan out there. It offers large contribution limits, unlimited investment options and the ability to borrow from the plan.

The great thing about the Solo 401(k), as opposed to a traditional, workplace plan, is that you are in charge of the entire thing. Everyone’s had access to a 401(k) at work at some point or another. The thing about those is that all employees (including the owners) have to be considered. The Solo 401(k) is all about you!

Is the Real Estate Market Trending Your Way?

A lot of factors need to be considered when looking at the real estate market. Obviously, one of the biggest things is location. You need to research the areas you are considering. Is it prime for those looking to leave the city? What kinds of amenities are nearby? Will you look at a rental or flip house? How much are you willing to spend and what type of account will you invest with?

These are just some of the questions you need to answer. It’s best to work with a real estate agent or seek the help of a real estate attorney to see if it’s in your best interest. As with any type of asset class, it’s best not to go all out in one investment. Of course, there’s risk with anything you invest in, whether it be real estate, the stock markets or a small business.

IRA Financial does not offer investment advice. The contents of this article are for educational purposes. It’s up to you do the research and decide where to invest your money. Work with a trusted financial advisor to decide your best course of action.

If you have any questions about using retirement funds to invest in real estate, feel free to give us a call at 800.472.1043 and we can answer any you might have. Thanks for reading and much success to all!