As the Federal Reserve continues to raise interest rates and has signaled for additional increases to come, the value proposition of a real estate IRA has risen in turn. During their meeting in June, the Fed boosted interest rates by 25 basis points (0.25%) to a range of 1.75%-2.00%. It marked the second 25-point hike in 2018 with additional increases possible for the remainder of the year and through 2019 (per www.businessinsider.com).
Finding an interest rate sweet spot can help the Fed mitigate inflation in a strong economy, but it can also present lucrative possibilities for renters to satisfy new demand and defend their retirement portfolios from stock market volatility. Let’s examine these two potential scenarios in more detail:
1. As borrowed money becomes more expensive, renting may become more financially prudent than buying. Interest rate activity from the Federal Reserve can serve as a benchmark for other financial institutions, meaning the 25-point jumps we’re seeing could complicate loans for average consumers over the next few years. High-balance transactions like mortgages may come with extra baggage and raise questions about the viability of purchasing a home.
According to Pew Research Center, the mid-2000s marked a notable shift in rental activity. From 2006 through 2016, reported heads of household who owned their homes decreased from 76.1 million to 75 million, while the number of renters skyrocketed from 34.6 million to 43.3 million. Data provided from individual American cities point to this ongoing trend in 2018. The prospect of signing up for 30 years of higher interest payments may further encourage families to rent instead of buy. You have the opportunity to build your bottom line by attracting cost-conscious tenants while helping them maintain financial flexibility.
2. Interest rate increases—and the specter of more to come—can send stocks reeling, but rental property in an IRA can counter-balance your retirement portfolio. The ripple effect of higher interest rates doesn’t just affect mortgage consumers; businesses may cast a wary eye as well. Many companies use debt leverage to finance their operations but sometimes struggle to stay in the black. Company A may choose to move forward with their initiatives and borrow money even though interest rates are on the rise, from which their profit margin may suffer as a result of the higher expenditure. Company B could forego their ambitions in the hopes of more favorable conditions down the road, which would directly stifle their short-term growth. Both companies risk incurring the wrath of Wall Street.
Although rising interest rates have no direct consequence for stocks, the equities markets have historically dipped in these cases because of the pickle they can create for businesses (per www.investopedia.com). Retirement portfolios situated entirely in stocks or mutual funds can suffer in tandem. Fortunately, as a real estate professional, you can hedge against such volatility by utilizing your expertise and incorporating rental properties into a self-directed IRA. The IRS allows retirement investors to fortify their tax-advantaged savings accounts (IRAs, 401(k)s, health savings accounts (HSAs), etc.) with alternative investment options like real estate, private notes, or precious metals. As such, you can facilitate the purchase of rental properties for your account, qualify tenants as you normally would, and work toward a better future using a strategy you’ve already mastered.
In this regard, past and future interest rate increases by the Federal Reserve can present a two-front opportunity to renters. You can provide a solution for individuals or families who are apprehensive about paying more for a house and diversify your retirement to help mitigate the effects of the stock market roller coaster. As headlines from geopolitics exacerbate uncertainty in various investment arenas, you can help prove that there are ways to make money in every market.
Author Blurb: Clay Malcolm is Chief Business Development Officer at New Direction IRA, Inc., a provider of self-directed retirement plans that hold alternative investments. He provides preliminary and continuing education to anyone interested in real estate as an asset in IRAs, 401(k)s, and HSAs. Mr. Malcolm can be reached at 877-742-1270 (Ext. 113) or firstname.lastname@example.org.
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