RealtyTrac released a new report Thursday morning on real estate investing in cities that are retirement hot spots — where at least one-third of the population is retirement age or older. These markets will very likely be an area of growth in the housing market over the next 15 years as baby boomers retire in greater numbers. The baby boomer generation started retiring in 2011, a trend that will continue through 2029.
Featured in this report are the top 15 retirement hot spots for real estate investing based on price appreciation and capitalization rates, and we’ve also provided 10 tips on investing in real estate using retirement accounts like IRAs or even 401ks — so that consumers can learn how to more quickly build their nest egg for eventual retirement down the road even while leveraging the growth in the retirement housing market today.
Also included in the data are other metrics that may be important to retirees: average annual temperature, annual chance of sunshine, and cost of living index where 100 is the national average.
10 Tips for buying real estate with IRAs and other retirement accounts
As a supplement to the report, RealtyTrac is also providing the 10 tips on buying real estate with self-directed IRAs and other retirement accounts from a variety of experts.
Look before you leap
Real estate veteran Sheldon Detrick, CEO of Prudential Alliance Realty in Oklahoma City, Okla., and Prudential Detrick Realty in Tulsa, Okla., knows a thing or two about real estate after 53 years of experience. With the changes in the real estate market over the last eight years, Detrick cautions that using retirement funds can be a good fit for some investors but it is not for everyone.
“It depends on the person’s age and the type of property,” he said. “Rental property, especially on the lower end, can be a good investment at any age. It’s usually profitable and easy to sell. On the other hand, buying land in outlying areas in anticipation of population growth is something only those under 50 should consider.”
Know the ground rules
Lorraine and Richard Walls, a couple who lives in Midlothian, Va., decided to use their retirement accounts to buy investment properties in southwest Florida.
But before making the plunge, the Walls spent a full year researching how self-directed real estate IRAs works, learning the basic ground rules every investor should know before they get started. Those ground rules include the following:
- Title: any property purchased by your IRA is owned by your IRA, not you individually.
- Purchase money: any money used to purchase a property with your IRA has to come directly from your IRA, not you individually, and you can’t be reimbursed by your IRA. This includes earnest money and closing.
- Rehab and carrying costs: similar to purchase money, and costs associated with rehabbing or carrying the property these costs need to be paid directly by your IRA. Your IRA custodian can help with this. For example, Equity Trust allows you to make these payments paperless online.
- Income: any income generated from the property has to flow back into your IRA
- Prohibited transactions: purchases made with an IRA need to be for investment, not personal use. Also your IRA cannot do business with family members of “lineal descent”, which includes yourself, spouse, parents, children, grandparents, grandchildren and great-grand-children. In addition, you cannot borrow money from a self-directed IRA or use it as security for a loan.
Use a Roth IRA to “pay taxes on the seed, not the crop”
According to Jeff Desich, chief executive of Equity Trust Company, one of the big players in the industry with $12 billion of self-directed IRAs, choosing a Roth IRA over a traditional IRA is a “no brainer” for most real estate investors because although a traditional IRA allows for tax-free contributions, the earnings are taxed when pulled out for retirement down the road.
“My dad would always say would you rather pay tax on the seed or on the crop,” Desich said.
Buy in your comfort zone
“We stuck to Lehigh, which everyone said don’t do it,” said Lorraine Walls, adding that the couple now owns a total of nine properties in Lehigh Acres, Fla., one of nation’s hardest-hit real estate markets. “I went with what I was comfortable with. We don’t need to make millions straight away.”
Plan your exit strategy but be flexible
Although she purchased the Lehigh Acres homes primarily for the long-term cash flow, Walls said steady gains in home price appreciation have her rethinking that strategy.
“Actually I’m thinking about selling because the prices have almost doubled in the last two years,” she said, noting that her real estate agent is urging her to list one home in particular. “I paid 58 thousand for this property and he wants to list it for about 105 (thousand).”
Consider creative investing strategies
Early in his investing career, veteran real estate investor Stan Brady said he focused mostly on fix-and-flip properties that he sold to owner-occupant buyers. But his strategies have evolved over time to focus on optioning investment deals that he finds and negotiates for other investors who don’t have the time to find and negotiate those deals themselves.
“A typical transaction for me would be taking an option contract … and then turn around and resell the property to a group of investors,” said the Atlanta-based investor. “Now they have a portfolio rental and I get back the profit in my IRA.”
Set up a 401k under real estate investing business
While a normal employer 401(k) plan won’t allow you to invest in real estate, every person who invests in real estate is in business for themselves, Desich noted, which gives him or her the right to have a retirement plan for that business.
If someone is investing in real estate and finding success, then that person can set up a 401(k) that permits real estate investments and which allows for contributions of up to $50,000 per year plus $50,000 for a spouse.
Make it a family affair and multiply your purchasing power
Investors have the option of partnering their IRA with others, according to Desich. For example, a husband and wife might each have a Roth IRA, and both may have a 401(k). Add in two kids who each might have a Roth IRA and the family can use all six accounts to purchase a deal and share the percentage.
Pay all cash or make a large down payment to compete with institutional buyers
Besides the tax breaks that allow investors to build their retirement nest egg, self-directed IRAs give buyers the option of paying all cash or making a sizable down payment — helping to compete in a market where multiple bids are the norm.
“Offer a high deposit and close within two weeks,” Walls said is her rule of thumb. “Offer them 50 percent, and bingo you’ll get it.”
Build a strong team around you
“You want to choose your partners wisely,” said Desich of Equity Trust, which hosts a Networking Conference for its clients each year. “Biggest point outside the IRA, we help to connect the dots. Whoever you use, you need to have an attorney or accountant you work with who can help you; or find a custodian who can help you answer questions. We’re not all created the same.”
To choose the top 15 cities, RealtyTrac started with all cities with at least 33 percent of the population aged 65 or older based on U.S. Census data. RealtyTrac further limited the list to cities with a positive capitalization rate (net annual income as percentage of the purchase price) using average rents on three-bedrooms home and the median sales price in May 2013. To arrive at the final rankings RealtyTrac sorted the list by annual price appreciation and picked the top 15 based on that metric.