Residential Rental Securitization – An Up and Coming Asset Class for Investors

Self-Directed Real Estate IRAThere was a time, in 2008-2010, when “mortgage” was a dirty word among financiers. The mere mention of the word evoked the word “toxic” as surely as “rhythm” invokes “blues.” Many investors ran away from the asset class after the fall – causing a shortage of capital and tight credit that prolonged an economic recovery and made it more difficult for investors to buy homes – and put construction workers and contractors back to work. Self-Directed Real Estate IRA investors saw this as a tremendous opportunity to buy real estate at below market prices.

Self-Directed Real Estate IRA investors realized that at the end of the day, people have to live somewhere. And until they get back on their feet, they’ll be renting. Naturally, they could build their IRA account balance while providing rental homes to those that needed them.

In many cases, renters are former owners who lost their jobs or ran into other difficulties and got foreclosed on or were forced to sell. In other cases, individuals and families have trouble saving for or otherwise qualifying for mortgages. Employment is too often part-time or unsteady work, as colleges continue to mint new bachelors’ degree holders at twice the rate the economy can create bachelors’ level jobs to absorb them.

The combination of weak employment, underemployment, and student debt from skyrocketing college costs weighing on young peoples’ ability to qualify for a mortgage has created a spike in demand for rental housing – and a collapse in homeownership rates to 1995 levels.

The result has been a rise in demand for a new kind of asset class: single-family rental securitization.

Think of it as factoring credit card receipts, but for landlords. A landlord with a lease in hand has a reasonable expectation of a stream of rental income. But they may prefer a lump sum, and therefore be willing to sell their anticipated stream of rental payments at a discount.

How It Applies to Individuals

This is, naturally, an investment opportunity for both the property owner and investors.

If you are a Self-Directed Real Estate IRA investor or a rental real estate investor and you would prefer a lump sum for any reason (a personal emergency, for example, or because you want to buy another property for cash at a discount and rent that one, too!), you can turn to the capital markets to provide that lump sum.

You can also do so to get yourself out of the business of rent collection. Depending on the terms of the agreement, the security holder, not the landlord, often takes over responsibility for collecting from someone who misses a rent payment.

Individuals can purchase an interest in an investment firm specializing in securitizing rental streams, via hedge funds and the like. Alternatively, an individual investor can do it himself – essentially lending to property owners against the stream of rental income.

While the market is still dominated by a few large players, such as the Blackstone Group, which aggressively bought housing stock during the recent real estate downturn, the overall market is expected to reach $5 billion over the next year. Blackstone even got their pool of rental customers rated ‘AAA.’

For Self-Directed Real Estate IRA Investors

Is it possible for you to invest in this asset class within a Self-Directed Real Estate IRA? Absolutely. As long as you pay attention to rules about prohibited counterparties, it’s not one of the asset classes the IRS restricts retirement accounts from investing in.

If you hold rental property in your Self-Directed Real Estate IRA and you want to convert your anticipated stream of income into a lump sum, be sure you do the transaction correctly. Don’t take physical control of funds before they are deposited in your IRA or other retirement account, because the IRS could construe that as a cash contribution that could blow your annual contribution limit.

Be sure to forward proceeds from any such transactions to your IRA or other Self-Directed Real Estate IRA via American IRA, LLC, to ensure you comply with IRS rules. As always, conduct these transactions in close coordination with your own investment and tax advisor. American IRA is a third-party administrator of Self-Directed Real Estate IRAs and therefore does not provide individual retirement, investing or tax advice.



Image by:

Rate this post