It has been a rough few months for most investors. But, owners of Real Estate IRAs have been doing pretty well.
The last week of March the Dow Jones Industrial Average plummeted 1400 points to reach a low for the year. The Dow fell 5.7 points and the S&P 500 fell 5.9 percent – the worst week for stocks in two years. The Nasdaq fell 6.5 percent that week. The S&P 500 is now 0.68 percent underwater for the year to date. The Dow is now 11.2 percent off its high.
Sure, that is not the end of the world – it is also up by more than 12 percent over the previous 12 months. Stocks have been exceptionally volatile lately. The U.S. stock market is also trading at over 27 times earnings which have been looking favorable. There is ample good news already figured into the stock market. One big earnings miss, or a disappointing jobs report could bring the whole thing down by a significant amount.
“The market has been priced for perfection … and that leaves the market vulnerable to surprises. In this case, it’s trade,” according to Baird analyst Bruce Bittles.
Stock Vulnerability Is Global
U.S. markets were not the only losers. Stocks lost money around the world – this time on fears of a potential trade war between the U.S. and China, sparked by talk of tariffs in Washington. China helped send shares plummeting by slapping retaliatory tariffs on more than 148 U.S. products, including steel pipes, pork, almonds and California wine.
In the above markets, diversifying into international stocks did not shelter investors from the pain.
Real Estate IRAs Outperforming
The investors who chose to diversify into Real Estate IRAs experienced a better outcome: U.S. house prices jumped 7.3 percent in January compared to the same times last year, according to data from the Federal Housing Finance Agency. Prices were up more than 10 percent in the Mountain region. Prices had jumped 0.8 percent from December to January – the biggest monthly increase since February of 2017.
Real estate has been delivering a solid annual return – on an unleveraged basis – while still showing much less downside volatility. Over the past 12 months, all regions in the U.S. were up, with the weakest regional market – the West South-Central region (Oklahoma, Arkansas, Texas and Louisiana) increasing by 5.1 percent. Home prices in Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona and New Mexico saw double-digit increases.
The Potential Benefits of Leverage in Real Estate IRAs
Real estate investors are doing much better than even those numbers suggest. First, real estate is commonly leveraged. So, an investor in Colorado with a typical real estate portfolio gain of 10 percent for the gain but holding just 50 percent equity is getting close to 20 percent, minus costs of carry.
Furthermore, he or she is collecting rental income the whole time. In this case, the landlord can collect two rents for the price of one, thanks to leverage.
Leverage increases risks, in a down market, it can make things very dicey for the borrower. At the present, however, most real estate investors have been doing much better than stock market investors, with less stress (assuming good tenants)!
The last few months have been excellent for Real Estate IRA investors. The strategy has been working as intended: Real Estate IRAs provide meaningful diversification to portfolios otherwise heavy with stocks. They are delivering solid price appreciation. They are generating current rental income, so investors get paid to wait. And the income they generate has been steadily increasing. Rents have been rising in nearly 9 out of 10 cities, according to data from RentCafe, helping protect income-oriented investors against inflation.
Own Real Estate IRAs
We suggest nearly every American with significant retirement savings or investable assets consider including real estate, including Real Estate IRAs, in their portfolio.
Holding real estate in a Real Estate IRA, Solo 401(K) or SEP IRA can help shelter increasing income from taxes and generate free cash flow on a tax advantaged basis.
Investing in a Real Estate IRA is very easy: Call American IRA, LLC today at 866-7500-IRA (472). You may also download our exclusive guide to Real Estate IRA investing here.
We look forward to hearing from you.