Market Overview

Feasibility Of Alternative Investment In Real Estate

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The real estate bubble has led to a seismic shift in the thinking of the American population when it comes to purchasing a home. When the housing market crashed, it caused a lot of trouble for banks, mortgage brokers, consumers and the whole economy at large. It led to a state where buying real estate is harder despite property prices being all-time recent low. The result is many people have decided to rent instead of buying homes. On the other hand, this turn of events has led to a boon for investors with available cash, who can snatch up properties at lower costs, while at the same time benefiting from higher than normal pool of renters.

The fiscal situation has also led investors to adopt alternative methods of investing. They range from retirement funds, IRA, private equity and promissory notes to gold, oil, gas and private stock in corporations. According to the JP Morgan website (NYSE: JPM), institutional investors are banking on the real estate market. “After struggling through the global economic downturn, real estate has re-emerged as an attractive investment class to both help diversify portfolios and hedge against inflation risk.” Knowledge of this is important in light of the previous crisis since retirement and pension accounts have become the chief investment vehicle for the majority of the US population.

The Economy Its Impact on the Self-Managed IRA Directed Into Real Estate

First and foremost, let’s analyze how IRAs fare as an investment in the real estate domain. Traditionally, the majority of well known financial institutions that act as custodians for IRAs mostly restrict investments into a limited corral of options such as publicly traded stocks, bonds, mutual funds and CDs. Whereas a self-managed IRA offers a wider diversified investment potential, a self-managed IRA allows the owner of the account to personally self direct the retirement account into a wider array of alternative investment options. With a self-managed IRA, the retirement holder can purchase and hold investment real estate within their retirement portfolio. Although, the purchase of real estate inside an IRA is generally not considered a traditional investment option for most IRA holders, this trend is changing.

If an account is properly structured, then tax court also allows for a form of self-directed managed IRA dubbed as the checkbook IRA. Using the self-directed IRA with check writing privileges, the retirement investor can have more autonomy as to where their retirement funds are invested while simultaneously saving time and money. When an investor has checkbook writing rights for their IRA account, they can simply write checks from their account on any transaction related to the investment without having to wait for a custodian to administer the checks on their behalf. Caveat emptor. Make sure that you know the rules regarding IRAs and seek professional help regarding self directed IRAs before converting an IRA and making alternative investments, otherwise even an unintentional mistake can be costly.

Feasibility of Alternative Investments

Alternative investments are finding a major route towards real estate. This can be seen from the behavior of groups like Fidelity Investments, a mutual fund giant. It is collaborating for an alternative fund owned by the Blackstone Group (NYSE: BX), the largest investor in hedge funds. The investments are being targeted towards real estate and with solid backing, investors are positive to chip in.

The alternative stock of long/short equity has fared well when checked with the S&P 500 benchmark. The figure of alternative funds added to the market from January till July 2013 amounts to $59 billion, which shows that it is the fastest growing mutual category. (Source: http://www.morningstar.com/Cover/Funds.aspx)

The feasibility can be understood from the fact that last year, alternative investments into areas like real estate and elsewhere amounted to $25.6 billion. The reason is that currently the interest rates are pretty low, so this area provides attractive yields. Then there is also the fact that investors are also attempting to diversify away from securities that have suffered a financial crisis.

Securities firms have also been in the news after William Galvin, Massachusetts Secretary of the Commonwealth, subpoenaed 15 firms for their sales practices with the senior population.

Nontraditional investments in real estate do have their risks, but currently they maybe in a better position to perform. 

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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