Rehab Investments vs Rentals in an IRA During Rising Interest Rates and Inflation

The housing market is presenting a few challenges to consumers right now. The inventory is there (for the most part), but consumers are challenged with higher-than-average home costs combined with historically high inflation and interest rate hikes. At the same time, rent rates have also skyrocketed. So, if you’re interested in real estate investments in your IRA or for personal income, now may be the time to make the move. Two of the most common assets are rentals and renovation projects. But there are differences between the two strategies you should understand before you invest. This article provides the details to help you evaluate rehab investments vs rentals, and which is right for you as a personal investment or in your IRA.

Rehab Investments vs Rentals: The Primary Differences

Rehab investment property can produce income in a relatively short period of time, but obviously requires renovation upgrades to make a profit. This means a Stacks of coins with colorful wooden houses on each stack representing rehab investments vs rentals in an IRA.lot of activity in a short time frame since the goal is to renovate and sell quickly.

Rental investments are less time-consuming and labor-intensive at the onset, but they do require maintenance and oversight. However, rentals have the benefit of potential appreciation over time, which can mean additional profit should you decide to sell in the future.

Are you ready for the fast pace of rehabs? Or do you prefer the aspects of overseeing the management and maintenance of rental properties over a longer period? There are pros and cons of rehabs and rentals to consider. But the main question to ask yourself is, “Do I want to earn a quick return or enjoy a steady influx of income over a longer period of time?”

So, let’s delve a bit more into both.

Rehab-and-Flips Can Deliver Quick Income

Rehab-and-flips can gain quick income if renovated and sold at a relatively fast pace and good profit margin. Successful rehabs spend less on renovations than on the property purchase to achieve desirable income at resale. Time is money in these scenarios because the faster you flip, the sooner you score that return on your investment.

These assets are perfect for those who have a knack for finding great deals in any economy. Distressed properties are still available. If the price is right and renovations can be performed efficiently, you have the potential to rehab and flip and make a healthy profit—especially in today’s housing market when houses are selling for a great deal more than they were two years ago.

Some experts predict interest rates may continue to rise in 2023 as the government moves to fight inflation. By some accounts, this may cause a surge in attempts to purchase homes before rates go up in the future. Others forecast rates to start going down in 2023, which could also propel a surge in home purchases. Either way, if you think you’d be successful investing in rehabs, well, the current environment could prove you right.

Rentals Generate Income Over the Long Haul

Rental property earns consistent income over a period of time. Successful landlords enjoy the steady influx of cash these assets generate. Location and desirability are key to their success. However, not only do you want ensure longevity of leases, but you also want to capture the potential bonus of property appreciation if you decide to sell in the future.

Careful oversight and proper maintenance keep tenants happy and the property well-preserved. But both require management. Keeping a close eye on expenses without skimping on important repairs is critical. Plainly speaking, rentals are only profitable investments if your expenses are less than collected rents.

With that in mind, rental property includes an interesting mix of opportunity:

  • (town homes, condos, and duplexes)
  • Single family homes
  • Vacation rentals (in the United States and overseas)
  • Commercial property (malls, restaurants, retail, and office space)

Again, your pace here is more relaxed than rehabbing in that you aren’t trying to make a quick turn-around profit.

Don’t Think You Have Money to Invest in Real Estate? Think Again.

If you are short on personal funds to invest, you have an alternative. If your retirement plan has ample capital to invest, you can buy real estate in a self-directed account to build tax-sheltered income for your golden years. In fact, real estate IRAs are a favored way to create retirement portfolio diversification that offsets the volatile stock market.

And there are numerous types of investment property available for your IRA. Assets include tangible property, tax liens and deeds, and private lending. All income from these investments is deposited directly into your IRA—tax free. Expenses must also be paid with IRA funds, though. So, make sure you retain enough income in the account after purchasing the property to cover costs.

How to Invest in Rentals and Rehabs with an IRA

IRA-owned rental and rehab assets work a bit differently than personally owned investments. As the IRA owner, you must understand prohibited transactions and avoid dealings with disqualified persons. For example, you are not permitted to perform work yourself (i.e., sweat equity) on renovations, maintenance, or management of the property. However, you do control all decisions. You choose the property, determine improvements or maintenance, and hire third parties to perform the work. You oversee and coordinate the process, so you’re definitely involved, but only to a certain degree.

Additionally, you must perform due diligence on every investment you make. Investigate the property, location, resale value, and rental potential.

Income generated from assets in your IRA is deposited directly into the IRA on a tax-sheltered basis. Expenses must be paid with IRA funds. For example, materials for renovations must be purchased with IRA funds and you must pay the person/s performing the work from your IRA’s funds. And you must pay for rental expenses (like new toilets, refreshing a unit to rent, and property upgrades) with IRA funds. So, make sure your account has adequate capital after the initial investment purchase to finance renovations and/or ongoing maintenance.

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Your Rehab Investments vs Rentals Takeaway

Whether you use personal funds or invest within an IRA, the type of property you choose depends on how involved you want to get with your investment. Either way, your decision is based on your operating on a management vs. work mentality—the primary difference between rehab investments vs rentals.

If you have questions about real estate investing an IRA, contact Advanta IRA today.

This article was written for informational purposes only and is not intended to provide and should not be relied on for investing advice.

About Scott Maurer

Scott Maurer, Vice President of Sales for Advanta IRA, is a recognized expert in the field of self-directed IRAs. With a law degree from the University of Florida and as a designated Certified IRA Services Professional (CISP), Scott’s keen understanding of rules and regulations fuels his passion to educate others on the power of investing in alternative assets using self-directed IRAs. Scott is a frequent guest on retirement and investing webinars and podcasts, and he has shown thousands of individuals how to achieve financial freedom by teaching them how to use their retirement funds to invest in private placements, real estate, private lending, and more. Throughout his two decades in the industry, he has watched numerous unique investments unfold, giving him great perspective of what is possible when people take control of their retirement funds and investing decisions.