The convergence of two important trends—the improving U.S. real estate market and growing interest in self-directed retirement savings plans—presents an opportunity for people saving for their post-working years. Self-directed IRAs give you the freedom to invest in a wider range of assets, including real estate.
The following data from clients of The Entrust Group, along with insights from respected organizations like the National Association of Realtors and Zillow, can help put the opportunity in perspective.
Where Entrust Clients Bought Real Estate
A look at where Entrust clients bought investment property in 2015 shows California and Texas still in the lead, with numbers little-changed from 2014. Both Arizona and Colorado saw 2 percent growth in purchases, while transactions fell slightly in Florida (-2 percent) and Missouri (-3 percent percent).
The top 12 states where Entrust clients bought real estate include: California (32.0 percent), Texas (9.0 percent), Arizona (7.5 percent), Colorado (7.0 percent), Florida (6.0 percent), Missouri (4.0 percent), Illinois (3.0 percent), Michigan (3.0 percent), North Carolina (3.0 percent), Georgia (2.5 percent), Nevada (2.5 percent) and Oregon (2.5 percent).
Real Estate Transactions by Region
The Western and Southern markets made up almost two-thirds of real estate investments nationally. The California, Florida, and Texas markets in particular experienced continued growth.
The lower cost of living and attractive property prices in so-called “secondary markets” like Austin, Texas; Portland, Oregon; Nashville, Tennessee; and Charlotte, North Carolina, make these high-potential markets. Florida markets are improving as well, with population and employment both growing.
Another demographic to watch is the growing number of Baby Boomers choosing to retire in many of these locations.
Following the national trend, Entrust clients demonstrated confidence in the Western market, with 3 percent more transactions in 2015 over 2014. Four out of five IRA investors chose to purchase real estate in the West or South in 2015.
One of the advantages of buying real estate as an investment, unlike buying a primary residence, is that you can buy anywhere. That might be where you want to live once you’ve retired or where you believe you can get the best return on your investment.
Nonetheless, many people still prefer to invest close to home, especially if they intend to generate income through renting the property. It is usually much easier to manage a property close to home than one far away. Property managers can take on a lot of the day-to-day responsibility, but there is a certain security in knowing that you’re nearby in an emergency.
That was the case for Entrust clients in Arizona, Florida and Texas, who chose in-state properties almost all the time. Colorado clients were more adventurous, choosing to invest out-of-state 28 percent of the time. Californians continued to set the pace for investments out of state; more than one-third of their purchases were out of state, most often in Arizona (9 percent), Texas (7 percent) and Nevada (5 percent).
What IRA Investors Paid for Properties
As you might expect, given the nationwide uptick in the real estate market, the average purchase price paid for properties in 2015—$177,777—was higher than the 2014 average price of $146,490.
But the definition of “local” means a fair degree of variation from one real estate market to the next.
In 2015 prices:
• Increased $11,000 in California
• Dropped an average of $19,000 in Texas
• Increased a whopping 78 percent in Florida
The average purchase prices in Entrust’s top five markets were: California – $204,000; Texas – $161,000; Arizona – $130,000; Colorado – $151,000; and Florida – $123,000.
Types of Property Bought by IRA Investors
Single-family houses are Entrust clients’ first choice of investment property, representing 44 percent of all purchases. Multifamily residences come in next, at 28 percent. Vacant land (12 percent), commercial real estate (3 percent) and various other properties (12 percent) round out their investment preferences.
Which Type of IRA Investors Used
More than seven out of 10 Entrust real estate investors use traditional IRAs—those that give a tax deduction at the time of contribution. That is a 2 percent increase over 2014. Other IRA types are holding steady as real estate investment vehicles: 15 percent for Roth IRAs, 12 percent in SEP IRAs and a slight dip to just 1 percent for Simple IRAs.
There may be a good reason to consider using a Roth IRA. Real estate is typically held as a medium- to long-term investment, for a median of five years, according to the National Association of Realtors. During that time, if your Roth IRA has satisfied the qualified distribution criteria, the Roth IRA gets a tax-free revenue stream from the rental income. Likewise, any underlying appreciation in the market value of the property is tax-free.
Who is Buying and Who is Selling?
While it may be hard to differentiate investor buyers from homeowners in the overall data, it is useful to know just who is buying and selling. For example, the relatively small percentage of younger Baby Boomers in the market points to the opportunities for those buyers to leverage their existing retirement savings and diversify their portfolio.
Here are the characteristics of the typical buyer:
• 44 years old
• $86,100 median household income
• 83 percent bought a detached, single-family house
• 32 percent were first-time buyers
• 67 percent were married
Here are the characteristics of the typical seller:
• 54 years old
• $104,000 median household income
• Sold for a median $40,000 over the original purchase price
• 89 percent worked with a real estate agent
Why Investors Are Buying
Nearly half (42 percent) of real estate investors bought property for the purpose of generating a rental income stream. The opportunity for value appreciation (14 percent) and finding a deal that was too good to pass up (16 percent) were the next most common reasons. These reasons mesh perfectly with the purpose of—and the laws governing—holding real estate in an IRA: as an investment and/or to generate income.
The Rental Market Boom
According to Zillow, there are 43 million renter households in the United States. In 2015, they paid $535 billion in rent. That’s a nearly 4 percent increase over rents paid in 2014. That increase has two causes: higher rents being charged and nearly 2 million more people looking to rent.
Real estate investors are well aware of the surging rental market and are capitalizing on it. In 2015, real estate investments for rental purposes increased by 5 percent.
Savvy investors are aware of this trend. It’s part of the reason real estate transactions are the No. 1 asset of choice among Entrust clients.
Three Reasons to Invest in Real Estate with an IRA
1. Invest in what you know. You can leverage your familiarity with real estate by investing in real property.
2. Diversify your portfolio to protect against market volatility and inflation.
3. Generate revenue and watch the value of your investments grow on a tax-deferred or tax-free basis.
Retirement saving and real estate purchases have something important in common: both involve decisions that blend personal and business considerations. For many people, owning real estate in a self-directed IRA is one more step toward a comfortable retirement.
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