There are many opportunities for Solo 401k investors, even in a changing real estate market. Whether your real estate glass is half full or half empty depends on your perspective. The “new normal” is that the residential market is softening. This is due to affordability and higher interest rates.
For sellers, the glass is half empty because houses are increasing in value at a slower rate. For buyers looking for a primary residence the glass isn’t much fuller because they’re the ones with the affordability issues.
Investors are the ones in today’s market with potential for a still filling glass.
Buy Low, Sell High, and Rent High
A beauty of Solo 401k and self directed IRA accounts are the many types of investments you can choose from. Residential real estate has always been a preferred asset for owner controlled retirement accounts. Today, the real estate market may provide near a perfect mix of variables for you as an investor.
This is especially true for those who bought a few years ago when the property value trajectory was in its early stages of flight (buy low). But shortly into that flight, investors took a “hold position” as it became a seller’s market. Today, that tide has turned. At least to a balanced market neither favoring buyers nor sellers.
Real estate follows a mostly predictable cycle (recovery, expansion, hyper supply, and recession). This has been a particularly long cycle beginning with the previous recession. Today we are on the cusp between expansion and hyper supply. Hyper supply and recession are the buyer’s markets. Solo 401k investors who bought low may consider selling for close to maximum profits (sell high). This is in anticipation of again buying at the low point during the hyper supply and/or recession phases.
For those not yet in the real estate market but ready to take control of their financial future, now is the time to position yourself to buy during the low points of the cycle.
The Hidden Opportunities for Solo 401k Investors
The strong rental market is your big upside when you control your finances.
Rentals include everything from apartment buildings to duplexes to single family houses and much more. Each one can hopefully deliver low risk with solid returns during the coming phases of the cycle. Investors may be more immune than others to many of the forces driving the cycle. That’s because their investment capital often isn’t dependent on wage growth.
Cash purchases still talk the loudest. Even a hefty down payment is something a family of four faces as an affordability hurdle. Cash is what Solo 401ks and self-directed IRAs bring to the table at exactly the right time. Also favoring investors is plenty of mortgage money ready to back up a decent down payment. Non-recourse loans can place you into multiple real estate holdings during this time of opportunities for Solo 401k investors. All things considered, today’s market highly favors investors who control their own finances.
Turnkey rentals for passive income can also make great opportunities for Solo 401k investors. Turnkey rentals have appeal for several reasons. Qualified renters are mailing you checks starting on day one. You can invest in the best (distant) markets using property managers. Long term renters are common. These are often rehabbed houses that won’t need costly repairs any time soon. Turnkey rentals may offer steady appreciation, passive income, and low maintenance.
Today’s Residential Trends
It’s all about affordability. Mortgage rates didn’t rise as much as expected. But with purchase prices already stretched beyond affordability (up nationally 7.6% for 2018), the slight rate bump pushed it over the affordability hump. Places like Seattle that overshot affordability now see a price decline. National average values aren’t likely to decline as long as moderate income growth continues. Appreciation is expected to stay close to 3.5% (April 2019), which is a slight decline from 3.7% in March.
“For the first time in a long time, we’re starting to see prices correct, and the big thrust that’s changing that narrative is the affordability challenge.” – Skylar Olsen, Director of Economic Research at Zillow.
The S&P Case-Shiller Home Price Index is another trusted indicator. It dropped for the 13th month in a row in April. That drop doesn’t mean prices are going down. What it means is prices are going up slower. The trend for home prices is out pacing inflation by about 1.5%. Available inventory levels are expected to continue increasing until wage growth overcomes the affordability problem.
The bottom line for the remainder of 2019 is modest price increases, increasing inventory, and new construction supporting long term housing needs. All creating a balanced market as the latest “new normal.” The big unknowns in the near term are possibly higher interest rates and a stagnating economy that slows wage growth.
Still, real estate is always about location, location, location. What’s happening at the national level may have nothing to do with what’s happening in your town…
Have questions about your Solo 401k and retirement? Solo 401K experts at Nabers Group will help you get your retirement funds into your control, where they belong. Contact us here.
