Real Estate Introduction
After the stock market, real estate is easily the most written about asset. Investors across the world look to real estate as a means of producing wealth and then as a vehicle for storing it. Due to its popularity, it’s often the first alternative asset that new investors consider. What exactly is it about land that makes it so attractive as an investment?
The Appeal of Real Estate as an Investment Asset
There are four main reasons that drive the popularity of real estate as a popular investment.
- Real estate is simple – The idea of real estate is an easy one. A property is purchased and then either utilized for rental income or sold to make a profit. The business model is simple, intuitive, and seemingly set up for success. New investors can picture themselves turning a profit on their very first deal. Obviously, the reality is much more complicated, but as a dream it resonates.
- Real estate is popular – No matter where you get your news, chances are that you’ll be hearing about real estate. It could be the source of a politician’s wealth, a neighbor who just sold a house, or a relative who manages a small rental. Real estate is ubiquitous in our lives and it’s always a topic of conversation.
- Real estate is owned by real people – Unlike other sources of wealth which are possessed by a small minority of the population, real estate can be owned by anybody. Chances are that you currently own your house or you grew up in a house that your parents owned. Investors know that real estate is something which is possible for anybody to get into, and they welcome the chance to strike off on their own.
- Real estate is conservative – Most properties tend to grow in value over time. Unlike a new business which can fail or a stock that can crash, real estate tends to retain its value. This makes it seem like a good first choice for the beginning investor. Of course (like any other investment) real estate can also lose value. An investor can buy in an overvalued market or a natural disaster can change demand. However, for the most part, investors usually do moderately well when investing intelligently in real estate.
Retirement Investing and Real Estate
Real estate is especially appealing as a retirement asset. Most retirement investors are looking at the long picture, and assets that can deliver over time are at the top of the list. Real estate, with its slow growth and often self-sustaining income, can do very well in a long range plan. Typically, home prices in the U.S. rise about 3%-5% per year. Add in the anticipated rental income, and an investor can be looking at a very nice rate of return.
What makes real estate even more appealing is that the long term growth does not come with a “locked-in” period. If a property suddenly skyrockets in price, there is nothing to stop the investor from cashing in and selling it. From this perspective real estate can seem like the ideal retirement asset: it possesses conservative growth but retains the ability to quickly turn a profit.
The Role of a Self Directed IRA in Real Estate Investing
In cases where retirement investors want to diversify with real estate, they are often held back due to the rules of standard retirement plans. Most IRAs and 401(k)s are set up to deal exclusively with stocks and bonds. These assets can take the form of individual stocks, mutual funds, or even more niche offerings. In the end, though, they all share a common essence. Their value is derived from the stock market. If a retirement investor wants to place funds in an alternative asset like private real estate, the standard plans can’t facilitate the investment. At that point the investor must turn to a Self Directed IRA.
A Self Directed IRA can come in many different forms, but almost all of them can facilitate real estate investing. There will be differences in how transactions are handled, fee structures, and investor participation, but they can each work well. Once an investor has an idea about what kind of property they would like to purchase, they can then talk it over with a self directed specialist. This knowledge – a combination of the asset and the investing vehicle – allows the retirement investor to move forward with real estate.