The real estate renovation industry is growing because Americans are moving less these days. But before you jump to remodel your kitchen or bathroom, it’s important to know that not all renovations yield high returns. If you own a real estate property, focus on exterior renovations to get the most bang for your buck.
- Residence sales and rentals are on the decline as Americans move less frequently.
- Real estate investors can direct their investments towards property renovations.
- Use a Self-Directed IRA for real estate renovations to increase the value of the property (tax-free).
Exterior Renovations Yield Higher Returns
Americans are moving less these days, which has ignited an interest in renovation investments. One form of renovation that yields the best returns are exterior renovations. According to a CNBC article, nine of the top ten real estate renovations are outside.
Exterior renovations that yield the highest returns include:
- Manufactured stone veneer, which can be used for exterior walls, came close to a 96% return on investment in resale value, according to the CNBC article.
- Garage door renovations will generate a 94.5% return on your investment.
Despite its popularity, bathroom renovations did not make the top ten property renovations list. Although kitchen remodeling was third on the list, it only yields a 78% return.
But it’s important to keep in mind that returns vary depending on region. For example, a Remodeling Magazine report revealed that garage door replacements can yield a 132% return, depending on location. And while kitchen remodels are underperforming overall, they tend to bring in higher returns in the Midwest.
Self-Directed IRA for Real Estate Renovations
A Self-Directed IRA can be used for real estate investments. A Self-Directed IRA is essentially a Traditional IRA, but allows investors to use their retirement funds to purchase alternative investments. Traditional IRAs and “Self-Directed IRAs” established at a bank or financial institution only allow their clients to make the investments they sell, which are generally traditional, like stocks and bonds. However, with a Self-Directed IRA, you can make traditional investments as well as alternative investments, including real estate, tax liens/deeds, crypto and much more.
Real estate investments, such as real estate renovations, are very popular among Self-Directed IRA investors. Real estate has the ability to appreciate in value, it acts as a hedge against inflation, and can diversify one’s retirement portfolio if they generally deal in traditional investments.
The Power of Tax-Deferral
When you use your Self-Directed IRA to fund real estate renovations, all income and gains the investment generates will be tax-deferred. You only pay tax once you take a qualified distribution, which may be several years down the road. This allows the investment to grow unhindered. If you have a Self-Directed Roth IRA, you pay taxes upfront and all income/gains are tax-free.
If you used personal funds to make the investment, you wouldn’t receive the advantage of tax-deferral. This is why the best way to purchase real estate is with your retirement funds.
If you want to increase the value of your property with exterior renovations, there is no better way to do this than with the Self-Directed IRA.
Real estate investors who would like to learn more about the legality of this retirement structure, and the rules that surround it, should call IRA Financial Trust directly at 800-472-0646.