A recession is coming. But not quite yet. Certainly, we’ll see another recession but for now, the Federal Reserve continues trying to keep the U.S. economy balanced with moderate inflation and moderated economic growth. Their primary tool for doing this is the federal funds rate. Back in March, the Federal Reserve raised interest rates by a quarter of a percentage point and signaled that the central bank is on track to raise rates twice more in 2018. The rate increase in March marked the sixth time since the financial crisis that it has raised rates. At the conclusion of its May policy meeting, the fed left interest rates unchanged. Currently, U.S. interest rates are at 1.5 percent to 1.75 percent, the highest in a decade.
Increasing interest rates 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 continue increasing. 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 (although slowing and expected to slow further).
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. 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 several years.
While the federal interest rate remains extremely low and bank mortgages are around slightly above four percent and heading higher, 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. Naturally, the lower your risk, the lower interest rate you'll be able to charge.
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/operate nor businesses owned/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 the custodian how you want your money invested. Unlike a financial adviser, custodians 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.
Please leave a comment about your alternative real estate investing thoughts.