The Case for Real Estate In Your Real Estate IRA
It was a nasty crash, but it was eight years ago. Since then, real estate asset prices have been relentlessly marching upward. While nothing is ever certain when it comes to investment, there are indications that the real estate bull market still has room to run – and that’s good news for Real Estate IRA investors.
Yes, the Federal Reserve has been gradually increasing interest rates. But that hasn’t helped bond yields as much as it probably should: Interest rates on CDs, money markets and shorter-term bonds are still much lower than historic averages, while interest rates on mortgages remain quite low compared to rent yields in most markets, combined with the potential price appreciation upside of real estate investing. Again, Real Estate IRA owners know that while there is obviously no certainty that real estate prices will continue to rise, assets are likely to continue to flow into real estate from weak-yielding bond markets as long as yields from traditional income-producing assets common to retirement accounts remains low.
Meanwhile, though the stock market seems very high at current levels, corporate bonds have been very highly correlated to stocks in recent years, giving investors very little reason to accept the meager yields available in them. This, again, tends to drive assets to alternative asset classes, including real estate – boosting prices in the aggregate.
The wealthiest investors and institutions are quite aware of this, and they are increasing their allocation to real estate in their own portfolios. A recent survey by Tiger 21 found that wealthy investors have an all-time record high (since they began tracking it in 2007) of 33 percent of their portfolios committed to real estate, including a Real Estate IRA.
The allocation to real estate and a Real Estate IRA comes at the expense of hedge fund exposure and equities. So the much-followed “smart money” appears already to be cutting back on their exposure to the stock market in favor of alternative assets.
Hedge fund allocation is at a record low of 4 percent, with hedge fund managers in the proverbial dog house as the traditional “two-and-twenty” compensation proves unwieldy in a low interest rate environment: Two percent fees takes up half the yield when interest rates are at 4 percent! And that pushes hedge funds further and further out on the risk curve.
Meanwhile, real estate continues to outperform, with REITs (real estate investment trusts) returning an average of 7.91 percent per year over the long term. Leveraged, those who own real estate directly using a self-directed IRA can potentially do much better – though leverage increases risks as well.
Here in the Southeast, real the real estate market is humming along, with South Carolina real estate experiencing a full-on boom. Vacancy rates have plummeted while new construction is racing to meet demand. Commercial vacancy rates in Lowcountry areas is below 10 percent, thanks to a local unemployment rate of just 3.8 percent in the area. Upstate South Carolina is experiencing a job boom, as well, with BMW leading the way, and attracting more job creation in its wake.
“The commercial real estate market in South Carolina is in exceptionally good shape,” said Mark Vitner, senior economist for Wells Fargo of Charlotte.
But experts are saying that prices here in the southeast have not caught up with the economic reality. Property can still be had at a very reasonable price for Real Estate IRA investors.
“We haven’t seen property values skyrocket because we haven’t seen as much foreign capital come into the state to overheat the market,” he said.