Best Retirement Plan: Invest in Foreclosures or Invest in a 401K?
Low interest rates on loans? Incredibly low. Interest on money in the bank? Incredibly low. When these two come together with a market still generously stocked with distressed and foreclosed properties, it’s hard not to consider the idea of investing in real estate. But should you trust real estate with your retirement money? In other words, is real estate a better bet than a 401K?
Price Is Right?
Distressed properties are generally a lot cheaper than they would be if sold at market rate. The savings aren’t as dramatic as they once were: as Sarah Louise Green put it last week, “Three years ago, you could get about 24 percent off compared to a traditional home resale. A year ago, that number stood at just under 10 percent. It’s now dropped to 7.7 percent, according to Developments.”
That’s still a better return on money than most bank account and CDs, if you can sell the home later for that 7.7% bump. As of Novemeber 29, 2012, Bank of America offered .08% on accounts totaling less than $8,000; and .20% on accounts totaling $250K or more. A 12-month CD or IRA yields .25%.
Prices in this country may still be lower than they were pre-crash, but they are going up steadily. Per Case-Shiller reports, September marked the 6th consecutive month of national home price gains. These signs of recovery make investing in real estate safer in many respects, since if the uptick continues, people who invest now can be fairly certain of profiting from their investment.
Better than a 401K?
The stock market dives yet again and you realize that your 401K savings may not be enough for you to retire comfortably. What do you do? John E. Miller, journalist for Business Insider, writes of one couple who took matters into their own hands by investing their retirement money in foreclosed properties.
David and Michelle Haisley are “taking advantage of the current real estate market and purchasing foreclosure properties while home prices are incredible low and immediately renting them out for a return on their investment. Plus, acknowledging that home prices are bound to rise throughout the foreseeable future, they can simply sell the house when it comes time to retire and walk away from the closing table with more than their 401K will provide.”
Of course, saying the Haisleys will end up making more than they would with a traditional 401K account and actually proving it are two different things. We can’t know for sure, without a time machine, how well the couple will do. But the issue is worth examining if you’re worried about how you’ll retire—something many of us these days when employer- provided pensions are going the way of the dinosaurs.
Knowing How to Invest
As with anything you spend money one, you’ll want to research carefully the market conditions of any place you think you might buy a distressed property. Questions to ask:
Will I need to rent this property instead of re-selling it, and if so:
- for how long?
- at what price so I see a profit?
Will I be the manager or will I hire a property management firm and if so, what does that do to my profit
- if the tenants move or refuse to pay rent for some other reason, will I be able to carry the mortgage?
- what are the tax benefits of being a landlord? Do they offset some of the expenses?
Do I want to re-sell the property? If so:
- does it need substantial repairs and if so, how can I complete these without eating my profit?
- is now a good time to sell in this area? Seasonality affects real estate sales, so study each unique market for current and projected conditions.
Can I pay cash for a Property?
Foreclosures in some parts of the country sell for relatively small sums. In Orlando, Florida, HUD lists foreclosures for under $37K; in Detroit,MI for as low as $5,500. If you have this money and can spend it without putting yourself in immediate financial danger, the advantage of paying cash is clear. No mortgage payment means you can be much more comfortable renting a property if you aren’t depending on the tenant to cover the mortgage. And, if your rate of return is better than the interest rate on your 401K or bank account, you’ve come out ahead.
However, buying and renting out properties, particularly out of state ones- is not for the faint of heart. You may want the help of a property management company.
Role of Realtor ®
Particularly if you plan to try your luck on out-of-state foreclosures, hook up with a local real estate agent who can help. These people will know neighborhoods, going rents, current market conditions, and can do some of the home visits for you so you don’t waste your time when you fly to the location. An experienced Realtor® will know contractors, property managers, and repair people as well, and can connect you to trustworthy support for your investment endeavor.
Also, real estate agents can give you both the most current comparative sales data (for both foreclosed and market rate properties) as well as projected market performance data. This way you know to price your home and can decide if the price makes the investment pay off.
ZipRealty Can Help
ZipRealty is licensed to work with HUD homes, and since HUD handles so many foreclosed properties, our brokerage could be an excellent resource if you want more information on investing in these homes. Many of our agents have experience not only with foreclosed, short sales, and other distressed property sales, but also with the process for financing them. Many Realtors® have also helped buyers acquire second/investment properties and are well versed in the steps to success. Find such a real estate agent--in the area you’re interested in—to get a conversation started. You may be taking the first step towards a comfortable and secure retirement.
Anna Marie Erwert writes from both the renter and new buyer perspective, having (finally) achieved both statuses. She focuses on national real estate trends, specializing in the San Francisco Bay Area and Pacific Northwest. Follow Anna on Twitter: @AnnaMarieErwert