In most parts of the United States, the real estate market has recovered from its down period in 2007-2008. And in many cases, the growth has resumed at an impressive pace. This leads many retirement savers to ask themselves whether now is a good time to invest in real estate with their self-directed IRAs.
The short answer is that it’s almost always a good time to invest in real estate, or any other asset for that matter, depending on how and where you invest.
For example, if you look to invest in a part of the nation that might not be close to you, or even to invest abroad, or perhaps even to invest in a type of property that you hadn’t previously considered, then you’re likely to find a number of opportunities.
But the more important set of questions you need to ask yourself prior to making any real estate investment related more to your investment outlook, tolerance for risk, and other issues.
How Will You Manage the Property? One important factor in your investment decision-making process should be how you plan to manage any properties you purchase. For example, do you intend to manage them yourself, or will you hire a professional property manager?
Keep in mind that if you manage the property yourself, you won’t be able to receive any compensation or other value for your time (such compensation would be considered prohibited “self-dealing”). If you hire an outside property manager, you are permitted to pay that individual or company with funds from your self-directed IRA.
What’s Your Budget? While it’s possible to make real estate related investments in virtually any amount, you’ll find that you have many more options if you have a larger balance in your self-directed IRA. The costs and fees associated with real estate investments include not only the price of the property itself, but also any closing costs or fees associated with the purchase transaction. At a bare minimum, you’ll likely have to pay annual property taxes on the investment, as well as some degree of maintenance or upkeep expense. These funds must come from within your self-directed IRA, because paying with outside money can subject you to IRS penalties.
Local Rental Market Considerations? When doing an analysis on a particular real estate market, be sure to not only consider the asking prices of houses on the market, and comparable recent sales, but also the local rental market conditions. Perhaps the price for home sales has gone up a lot recently, but if the prevailing rents for those properties has increased even more, then you may have a favorable set of investment conditions (assuming that you plan to rent the property you purchase).
Finally, regardless of the type of real estate investment you make, be sure to have a plan for when and under what conditions you’ll sell the property. You don’t want to become emotionally attached to an investment, and you should always be willing to move on to a better investment opportunity when circumstances dictate.