One of the most appealing aspects of using a Real Estate IRA—that is, a Self-Directed IRA in which you invest in real estate assets—is the possibility that real estate will climb in value while it remains in your retirement account. For some, that means opportunities for flipping homes while prices are falling. But recent stunning news has the real estate market in a tizzy. Let’s dive in.
A “Sharp Downturn” in the Housing Market Hurts Opendoor
Opendoor, one of the largest platforms for flipping houses, recently saw a major loss. According to a recent article from Bloomberg, the company “lost money on 42% of its transactions in August,” which is data from YipitData. In some key areas, such as Los Angeles and Phoenix, the company lost money on 55% and 76% of sales, respectively.
In other words, home-flipping is going poorly for many, especially with the rising interest rates. It’s getting harder for U.S. consumers to afford a mortgage, which in turn is driving down prices on many real estate assets across the country. And for Opendoor, that may not be it, as according to Bloomberg: “Opendoor warned investors that it expected to lose as much as $175 million in adjusted earnings before interest, taxes, depreciation and amortization in the third quarter.” This isn’t the only bad news in the world of real estate. Zillow’s iBuying business, for example, saw similar pricing problems last year, according to the post in Bloomberg.
What does this mean for Self-Directed IRA investors who have been flipping houses, or looking to invest in real estate as a hedging asset class that can provide flexibility outside traditional stock market investments?
Why the Real Estate Market is Looking This Way
“iBuying,” or home flipping on digital platforms, is a speedy process that relies on buying homes, making some repairs and cosmetic updates, and quickly turning around and reselling properties. Many home flippers may be familiar with this process. In a period when home prices are going through the roof—as we’ve seen in recent years—this is a sustainable business model, as it showed plenty of profits for Opendoor’s users.
But now, mortgage rates are moving towards 6% territory and beyond. That has “finally pushed would-be buyers to the sidelines,” according to Bloomberg.
That shutters demand, which is key to turning around and making a quick sale on a recently flipped home.
What does this all have to do with Self-Directed IRAs? For Self-Directed IRA owners, many choose to hold on to real estate assets and work through a property manager, who collects rent into the account on behalf of the account. This keeps money flowing in, even when real estate prices might be low. In other words, Self-Directed IRAs make it possible to use a strategy that may hedge against a period of high mortgage interest rates.
Everyone’s retirement strategy is their own, and American IRA makes no specific recommendations. However, the recent news shows how important it is for Self-Directed IRA holders to be aware of big, country-wide fluctuations in supply and demand. These fluctuations can have a dramatic effect on your retirement, especially if you rely on only one strategy for growth.