Is Your Retirement Account Recession Proof?

3 steps to avoid the volatility of Wall Street and create retirement investments that can perform in any market cycle.

Most Americans are facing a massive problem with their retirement account.  Essentially, the system their retirement funds are invested in is speculative, and is simply not designed to perform during all phases of the economic cycle.  The result is: they get to enjoy riding the wave when the markets are good, but they get crushed when the markets crash.  Because the system is built around traditional Wall Street investment products, it is destined to fail when the cycle inevitably reaches its top and turns downward.  Speculation is not appropriate for retirement accounts, yet that is essentially what most Americans are doing because they don’t know where else to turn.

Most of the money being put aside for retirement is tied up in this system, and when the markets crash, the average American who is unaware of other options will get devastated again.

As an investor, you have to remember one of the most important economic truths: history always repeats itself.  Wall Street will crash again.  You should expect it, but you don’t have to bury your head in the sand and ignore the fact that it is coming.  There is a strategy available that can shelter your retirement account from losses and continue to make positive returns, even in the midst of a market crash.  But this kind of strategy requires a perspective that Americans are not going to hear from a big-box investment advisor.

This is a strategy that can allow you to remove your retirement from the volatility of that system and take back control of your investments.  A strategy that can allow you to grow your retirement in any market.  A strategy that can allow you to avoid losses and obtain peace of mind, knowing your retirement account can weather any storm that comes along.

This strategy involves 3 simple steps:

  • Getting out of Wall Street – The first step is to understand how you can move the funds in your retirement account out of Wall Street investments through a self-directed account, a tool most investors are not familiar with.
  • Finding the Right Alternative – The next step is to find an alternative investment strategy that is perfectly suited for a retirement account. An alternative capable of performing through all market cycles, and not just speculating on the market going up. The goal is to invest in a recession resistant asset, capable of performing while everything else is in chaos.  One of the best investments for this strategy is a unique type of real estate that we will describe later.
  • Self-Directing Your Account – The final step is to move your retirement funds into the alternative you’ve chosen through your new self-directed account. Then start enjoying peace of mind, knowing you are not exposed to Wall Street volatility anymore.

Step 1 – Getting Out of Wall Street

Most people are not even aware they can invest in real estate with their retirement account.  The large financial institutions that act as custodians for most Americans do not offer alternative investments, so most investors assume their retirement account is limited to traditional investments like stocks, bonds, and mutual funds.

The secret, however, lies in the Self-Directed IRA (SDIRA), a retirement account that gives you the ability to “direct” your retirement funds into alternative investments such as real estate.  This tool can give you back control of your retirement account and allow you the freedom to choose investments that can insulate your retirement savings from market volatility.

Most retirement accounts qualify for this strategy, but some do not, so you will want to seek the guidance of a company that specializes in administering Self-Directed accounts to confirm whether or not your account qualifies.  Because there could be a conflict of interest, you will want to avoid asking your existing account administrator for guidance; they may not be familiar with Self-Directed accounts, and they may even tell you it cannot be done.  Also, remember their motivation is for you to leave your money invested in Wall Street.

Once you’ve opened a Self-Directed IRA, you’ll need to fund your new account with a transfer from an existing IRA or with a rollover from another qualified retirement account. Be sure to follow the guidance of your new account administrator so funds are moved properly. If you do not move funds in the correct way, you may endanger your tax-deferred status.  As soon as your account is funded, you’ll be ready to “self-direct” into an alternative investment.

Step 2 – Finding the Right Alternative

A SDIRA will allow you to invest in other types of alternatives, but the most common one is real estate.  However, it is extremely important that you choose the right type of real estate for a retirement investment.  All real estate is not created equal, and it doesn’t make any sense to move your money out of Wall Street, just to invest in real estate that has a similar risk profile. That would simply be speculating within the real estate market instead of the stock market.

The most appropriate real estate for a SDIRA should:

  1. Have the ability to weather the worst economic storms.
  2. Be on the lower end of the risk spectrum.
  3. Be capable of delivering a dividend to you on a regular basis, in all parts of the economic cycle.

There is a little-known strategy within real estate that fits these requirements perfectly.  Even in the midst of the dire market conditions of 2008, this unique niche would have made you look like the smartest investor around, had you repositioned yourself to take advantage of it.  By correctly adding this particular type of real estate to your retirement account, you could have enjoyed predictable returns while sidestepping the volatility of traditional investments.

The Right Alternative – Mobile Home Parks

On the surface, mobile home parks (MHPs) may not look like the type of real estate you’d want to invest in, but when you look deeper, you’ll find unique qualities that make MHPs perfect for a retirement investment.  Here’s why investors love them:

  1. High Demand – Demand for mobile homes has never been higher. Affordable housing is becoming more difficult to find for both new families and retiring baby boomers.  In addition to the increasing demand, there is a declining supply of parks in America due to redevelopment.  More parks are going away than are being built, causing the demand for this affordable housing solution to increase even more.
  2. Stable Cash Flow – A unique characteristic of MHPs is that the tenants own their homes. They pay monthly rent for the “space” under their home, but they own and make repairs to their home. Because of that, they behave more like a homeowner than a tenant, and tend to move far less often than tenants in other types of real estate.  This results in low tenant turnover, which creates more stable cash flow.
  3. Recession Resistance – During a recession, when people are seeking affordable living, the demand for MHPs increases even more. This heightened demand, coupled with the stable cash flow created by low tenant turnover, allows MHPs the unique ability to perform strong through a recession, when most other segments of the real estate market are struggling.
  4. Uncorrelated Performance – The performance of MHPs are not correlated with the stock market, the economy in general, or the broader real estate market. When everything else is in chaos, MHPs offer the most predictable cash flow with the least amount of volatility.

Regardless of market conditions, MHPs can offer more stable returns with less risk than traditional investments and other types of real estate.  That’s why they are such a good fit for retirement investing and as an alternative investment in SDIRAs.

Step 3 – Self-Directing Your Account

Before you invest in real estate, it is paramount that you understand that you cannot directly or indirectly benefit from your SDIRA account, and your SDIRA cannot directly or indirectly benefit from you.  That means, for example, you shouldn’t fix and flip houses or rentals yourself with your SDIRA. You certainly shouldn’t buy a vacation rental and let your family use it on the weekends. Those examples will likely be prohibited, could endanger your IRA’s tax-deferred status, and might trigger tax due on your entire account.

More importantly, those methods could turn managing your retirement account into another job for you, something it definitely shouldn’t be. When you invest in real estate with your retirement account, it should be a passive investment without day-to-day involvement on your part.

The entire investment process should be handled by professionals who are experts and understand the rules governing Self-Directed IRAs.  Your job is to “self-direct” by choosing the type of real estate and the experts who will be investing on your behalf.

Ideally, you will want to work with a company who offers passive investments in real estate, where you can purchase shares in a project, similar to the way you would purchase shares of company stock.  This type of investment is called a real estate syndication or fund.

The process of investing in a syndication or fund is similar to purchasing shares of company stock, but in this case, you own part of a property or portfolio of properties.  The real estate company finds the good deals, performs all the work, and takes care of the day-to-day operations, while you share the benefits of ownership alongside them.

As we mentioned above, all real estate is not created equal, so make sure the company you choose to invest with has a smart strategy for choosing the right kind of retirement investments.  You’ll want to avoid the sales pitch of a “good deal” that is not backed by a high degree of experience in both real estate investment and Self-Directed IRAs.

They should also be able to demonstrate proficiency in all aspects of real estate, including sourcing good deals, due diligence, property management, capital improvements, asset management, legal, accounting, and (the often overlooked) timely delivery of reports and tax documents.  Be sure to ask about the company’s processes related to all of these items.

The company should also understand the rules governing Self-Directed IRAs, including all aspects of prohibited transactions, self-dealing, disqualified persons, required minimum distributions, transfers and rollovers.

Once you’ve found the right company to partner with, you can “self-direct” an investment from your new account into a property with them.

Summary

To avoid losses and market volatility, you will need to reposition your retirement funds out of traditional Wall Street investments and into a more appropriate alternative.  The Self-Directed IRA (SDIRA) is the tool that will allow you to do this.

The right real estate investment for your SDIRA should be capable of producing stable returns over a long period of time and have the ability to weather the worst economic storms.  Mobile home parks have a unique ability to produce stable cash flow during difficult economic times.  They are often misjudged or overlooked, but if you had added mobile home parks to your retirement account even in the midst of the economic plunge of 2008, you could have enjoyed predictable returns and sidestepped the crazy volatility of traditional investments.

Most importantly, take the time to find a company with a sound real estate strategy capable of performing through a recession.  This is your retirement after all, and you will want to avoid both scammers and well-intentioned people who are not familiar with Self-Directed IRAs.  Ask for references and perform your own due diligence to be sure you’re putting your retirement account in good hands.

Approached correctly, investing in the right type of real estate though a Self-Directed IRA could be the most powerful wealth building strategy your retirement account will ever see.

Jack Martin is a principal at 52TEN, an Arizona investment firm focused on Mobile Home and RV parks.

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