In December, the Federal Reserve announced that it will be raising the short-term interest rate for the first time in almost a decade. It has held that interest rate at near zero as a method of stimulating the economy. The initial increase will be mild at an announced rate increase of between 0.25 and 0.5 percent. However, the announcement also indicated that more rate increases are coming if the US economy continues its slow growth or accelerates. However, the world economy remains constrained and that will influence US financial policy as well.
Increasing interest rates will certainly affect the real estate investment business. If you are borrowing money as a mortgage to become a landlord, your business costs will increase but rents are also likely to increase. If you are borrowing money to rehab and flip houses, your cost of interest will increase but it is still a seller’s market with selling prices on the increase.
Lending Money Is Where the Money Is At
As always, there is risk when it comes to any kind of investing, including real estate investing. One way of minimizing that risk while increasing earnings is by becoming the lender as interest rates rise. A great sources of funds for this are IRAs, 401ks, and other retirement accounts. The secondary lending market (alternative to bank loans) has become much stronger over the past seven or eight years.
While the federal interest rate remains extremely low and bank mortgages are around four percent, private lenders are earning between eight and twelve percent. Of course, with that comes a higher degree of risk. Earning the higher interest rate means lending to higher risk borrowers. However, investing retirement funds in a first mortgage provides a high level of security when it is secured by the house or other property. Security can be further increased by loaning no more than 70 percent of the property value and requiring the property buyer to invest the other 30 percent. Of course, the lower your risk, the lower interest rate you’ll be able to charge.
Alternative Retirement Investing
Investing retirement funds is not limited to Wall Street stocks, bonds, and mutual funds. There are many alternatives. One is a self-directed IRA that can be managed by a third party such as PENSCO, one of the dominate self-directed retirement account custodians (you can learn the significant difference between custodians and administrators at this link). These types of accounts allow you to invest your retirement funds in alternative investments such as real estate. You can either directly purchase the real estate or loan money secured by real estate. You can also buy stocks in private companies and have many other investment opportunities.
There are very specific rules that you must follow when making alternative investments. One of the most important is that you can’t invest in a company that you personally own or operate nor businesses owned or operated by direct family members. That’s where a self-directed IRA custodian comes in. You can place your retirement funds in a trust with the custodian and direct them how you want your money invested. Unlike a financial adviser, they won’t give you investment advice. You have to specifically tell them where you want to invest. Just like a traditional IRA, you don’t financially benefit until you reach retirement age. But upon retirement, you can sell your assets and begin drawing your retirement pay.
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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for seven years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. In the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.