Rental property is one of the most popular self-directed investments. Statistics released in 2017 indicated that housing demand was at a four-year high, shooting up on Redfin’s Housing Demand Index from 83.1 in 2014 to 127 in August of 2017. This may be attributed to the steady growth of the US economy, which stood at two percent. The global increase in population occurred in that same year.
What is undoubtedly clear is that more people are looking for somewhere to settle down. Some investors are choosing to redirect some of their funds into real estate. Investing in real estate is a good way to bring more diversification to your portfolio. You may find that many are opting for this route, especially when it comes to choosing where to direct their retirement funds. Rental property is a route to consider when growing your portfolio.
Why You Should Buy Rental Property
The real-estate market offers several viable options. One option is to buy property to remodel then sell at a markup. Another alternative is to buy a property and rent it out. There are a number of good reasons why people opt to invest in the property market and how it pays off in the long run.
The key incentive to investing in rental property is that it holds the ability to provide a constant stream of income. If you choose the right deal, income may be consistent with the current inflation rate. When you are simply saving your money in a bank account, it doesn’t necessarily keep up with inflation in the same way.
Buying rental properties may also offer a chance to do some social good in the community as a landlord by ensuring that your properties cater to persons of all demographics and those with disabilities. It is a sad fact that most rental spaces greatly overlook the needs of people with disabilities. These property owners might fail to provide the amenities and installations that would make their lives easier.
Do Your Research
Before diving into the rental property market, it is necessary to do in-depth research prior to committing your funds. You need to consider how much money you will need to invest upfront. Similarly, factor in the mortgage that will come with the property. It’s important to know whether it will be manageable for your investment portfolio over the life of the loan. Consider the real estate trend in the area you are investing in. You may find that the property value has depreciated after five years, which could cause losses in your portfolio.
You will also have to consider the tax burden you will need to shoulder and if it will still allow you to make a profit. Fortunately, when you buy rental properties with a self-directed Solo 401k plan, your gains and income can grow tax-deferred. If you use Roth 401k funds to buy the property, those gains and income can even grow tax-free. The Solo 401k doesn’t have a tax return, and can use leverage to buy properties. This makes using retirement funds to invest in real estate attractive to some investors.
As part of your research and due diligence, sit down with someone with experience in the market you’re considering investing in. Ask your contact to relay the pros and cons that they have encountered. This way you can have a clear-eyed view before committing yourself and your funds to investing in buy and rent properties.
Do the Math
The most important aspect once you dedicate your money into a project is to see growth and see a return on your investment. This is why it’s necessary to do the math before you consider any real estate investment. With a rental property you must consider both one-off costs and running costs. One-off costs may include the down payment on the property. Running costs cover everything from the mortgage, taxes, management costs, and even repairs. Factor in the shifting mortgage rates as well as the possibility of lacking tenants and subsequently losing out on rent.
And remember, if your Solo 4o1k or Self-directed IRA is buying the property, all expenses must come from retirement funds as well. You are not allowed to mix personal and retirement funds in one deal as that would be a prohibited transaction.
The rental property market is undoubtedly lucrative if you can complete your research and find the right deal. It is the perfect investment avenue for those looking into a long-term source of income in a growing property market. Always proceed with caution when allocating funds from your portfolio, especially if you’re using retirement funds. However, take some time to consider rental real estate in your portfolio as it could be a big win!