Wall Street Journal Shines Light on Self-Directed Real Estate Investors and a Fix-and-Flip Hot Spot
In a recent Wall Street Journal article*, “Cleveland Is a House-Flipping Hot Spot, and Covid Adds Fuel,” Ryan Dezember explains why real estate investors seem to be moving away from the Sunbelt to lower-priced areas, such as Cleveland.
Homeownership is at risk due to the financial crisis stemming from the recent pandemic, especially for certain groups like millennials, potentially presenting an opportunity for real estate investors to leverage rental properties.
“That’s where Cleveland comes in,” states Dezember. Equity Trust is headquartered in Westlake, Ohio, which is only about 18 miles west of downtown Cleveland.
Cleveland is viewed as a profitable area in the U.S. to fix and flip properties specifically, a strategy used by many investors who invest in real estate in their self-directed IRA. Dezember says the typical fix-and-flip deal done in the Cleveland area, as well as other cities around the Great Lakes, sells for double the cost, which is a big differentiator from the Sunbelt area.
“California property-investment adviser Kathy Fettke steers clients clear of the Sunbelt cities where Wall Street gobbles up houses and surging prices have squeezed margins, guiding them instead to northeastern Ohio,” states Dezember.
According to Zillow.com’s home value index, the median home value in Cleveland is a little over $68,000. The median home value for the state of Ohio is about $153,500. Compare this to California as a whole ($578,200), or even Sacramento ($362,000).
“Mortgage delinquencies doubled between March and April to nearly 3.4 million, according to Black Knight Inc. That could put more foreclosed homes on the market for investors,” says Dezember.
Whether investors are in Cleveland, or other housing markets impacted by COVID, a self-directed IRA allows individuals to use their retirement funds to invest in properties, such as fix-and-flips, apartment buildings, and more.
Individuals often buy rentals with self-directed individual retirement accounts, which allow savers to diversify beyond stocks and bonds.
Not only do investors have the option to purchase property with a self-directed account, it’s possible to lend money for these types of investments to real estate companies, startups, LLCs and more.
“The Retirement Industry Trust Association says $5.6 billion of IRA money is invested in property and an additional $27.7 billion with limited liability companies, which usually own income-generating real estate. The spending power is even greater considering lenders will ﬁnance most of the purchase price,” he says.
Rental payments are sent to Equity Trust for the benefit of (FBO) your IRA. The checks or money order should be made payable to: “Equity Trust Company Custodian FBO [Your Name] IRA.” Once received, the checks or money orders are deposited into your IRA. All checks must be sent to Equity Trust with a payment coupon.
Yes. A self-directed IRA gives you the ability to diversify your portfolio with additional investments that are permitted by the IRS, in a tax-free or tax-deferred environment.
According to the IRS, a prohibited transaction is improper use of an IRA account or annuity by the IRA owner, his or her beneficiary or any disqualified person. Examples of prohibited transactions with an IRA are borrowing money from it, selling property to it, using it as security for a loan and buying property for personal use (present or future) with IRA funds.
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