When looking for investment strategies to help you increase your retirement, one of the hottest options out there right now to invest in is individual real estate. Pundit after pundit is screaming, “Buy real estate! Buy real estate!” And while I don’t necessarily disagree with this concept, I do have a few suggestions to make before you start using retirement funds to buy real estate investments.
Warren Buffett once said, “When others are greedy, be fearful, and when others are fearful be greedy.” The auspice behind that advice is that money flows to where investors are getting the best return at that time. However, that’s usually not the best way to invest. Here’s a real-life example of someone that I know that followed the money a few years back.
Back in about 2005, banks were loaning money to anybody and everybody to purchase real estate and investment properties. Basically, anybody and their brother could get a loan. I knew guys working for UPS that didn’t know a thing about building houses decided they wanted to be contractors. Even these novice builders were being approved for loans in excess of $500,000 without any downpayment. CRAZY! Some of these guys did not even have contractor’s license, yet banks were handing over large sums of money to them. There were also people cashing in their retirement accounts and buying hard real estate assets.
One of our clients did just that, before they every began working with us. He withdrew a substantial portion of his retirement assets, like three-quarters, to purchase real estate. Fast forward to today. If he had left the money in his portfolio, even in a basic, very expensive, equity mutual fund, it could have possibly returned somewhere around 300% over the last 12-years. However, he chose to ‘follow the money’ at the time and purchase individual hard asset real estate. Today the real estate he purchased is valued at the same price as it was when he initially bought it.
Don’t misunderstand me. I’m not saying real estate is a bad investment. Not at all! I personally have invested in real estate many times. Why? Because one of the most significant advantages to investing in real estate is the fact that you are eligible for pretty cool tax deductions. I actually advise a many of my clients to invest in real estate. What I don’t often encourage is using funds from IRA’s, 401(k)’s, or Roth IRA’s to invest in the real estate. (Yes, it can be done. Notice I said “often”. I don’t often recommend this strategy for most clients, but I do have a few clients who are well disciplined and using self-directing as a viable tactic.) Listen, retirement accounts are governed by so many rules that you can end up costing yourself a lot of money.
I also discourage paying cash for real estate. For the most part, paying cash doesn’t make sense. Interest rates are low! You are building your net worth up with someone else’s money, which is pretty cool. Also, the smaller down payment you make on real estate often creates the greatest Return on Investment. Paying cash kills your ROI.
The media is buzzing right now with real estate, and sometimes it does make sense to invest in real estate. However, if you were going to take a large chunk of your portfolio to throw into the real estate market you should have done that about four years ago when prices were low…not when they are reaching all-time highs again. I understand you may think you can turn a quick profit. However, I see it day-in-day-out, people making poor decisions because they are buying with emotions as opposed to purchasing investments as part of a long-term plan.
If you are going to buy real estate, use non-qualified assets and use a small down payment. Make sure that you’re working with a CERTIFIED FINANCIAL PLANNER™, who is holistically looking at your life, not a stock jockey whose saying, “Hey, buy this stock or this stock this day” Find someone who knows what you’re trying to accomplish and let them guide you down a financially simple path.
If you have questions about investing in real estate, feel free to contact me, and we can discuss the specifics of your situation.