Picture this: the scorching summer of 2023, a time when Detroit’s real estate scene underwent a remarkable transformation. Single-family rental homes took center stage, and rental rates soared to new heights. Join us on a journey through this extraordinary season as we dive deep into the twists and turns of Detroit’s housing market. With facts, figures, and intriguing comparisons to previous years, we’ll unveil the dramatic shifts that have shaped the Motor City’s housing landscape.
The standout trend of the summer was the resurgence of single-family rental homes in Detroit. This resurgence is backed by hard data:
Detroit’s rental rates saw a noticeable upswing during the summer, driven by a combination of factors:
The summer of 2023 has indeed been transformative for Detroit’s real estate landscape. Single-family rental homes, backed by a 15% increase in availability and a 20% boost in rental applications, have risen to prominence. Simultaneously, rental rates surged by an average of 12%, outpacing previous years.
While these developments provide promising prospects for investors, they also underscore the pressing concern of housing affordability for residents. As Detroit evolves, finding the delicate balance between meeting housing demands and ensuring affordability remains a top priority for policymakers and stakeholders. The summer of 2023 has set the stage for a dynamic period in Detroit’s real estate journey, one that will continue to shape the city’s future.
When it comes to investing in real estate, it can be difficult to finance the initial purchases. In many cases, those who would like to invest in rental properties don’t—simply because they don’t think they can.
But, did you know you can actually purchase rental homes with your IRA?
Here’s the deal…
What is an IRA?
An IRA, or Individual Retirement Account, is a form of retirement plan utilized by a large population of the US. These accounts, hosted by a range of large financial institutions, provide tax advantages which a regular savings account would not, making them a popular choice for growing retirement funds.
Essentially, IRAs allow you to grow your funds without incurring any income or investment taxes.
Many people opt to use what is called a self-directed IRA. Self-directed IRAs are slightly different than a traditional IRA in the fact that they allow you to invest in other avenues, such as stocks, bonds, options, mutual funds, ETFs, and REITs.
But, they are also great for investing in real estate.
Rules to Using an IRA to Invest in Rental Properties
Using an IRA to invest in real estate isn’t a simple cut and dry process, but it is very do-able—even for first time investors. The major point of notice when attempting to do this type of transaction is to realize that you and your IRA are not a joint task force. The entire process has to be overseen by a legal custodian to ensure there are no violations of the rules put in place to govern these types of transactions. The custodian will manage the entire process, including any buying/selling transactions, associated paperwork, and financial reporting. A custodian will charge a fee for the service, so make sure to account for that in your budgeting.
Most importantly, you need to understand that your IRA owns the property—not the other way around.
There are several strict regulations put into place that govern this property, too. The property must be used to generate an investment income, not a personal income. It also cannot be used as a vacation home, an office, or rented to family members. It also has to be a new purchase, not one which you already owned.
Things to Know about Using an IRA to Invest in Rental Properties
As the property will be owned by your IRA, not you, there are a few snags that you need to be aware of. When you purchase a property using an IRA, any expenses incurred by the property—such as maintenance—comes out of your IRA’s funds, not yours. Of course, this also means that any income generated by the property returns to the IRA, not to your pocket. If you are looking to purchase property to add a monthly income to your checking account, this isn’t the way to do it. However, if you are looking to add to your tax-free IRA account to save towards retirement, then this is a great way to accomplish that.
Another important different to be aware of when using an IRA to purchase property is the tax situation. As an IRA is already exempt from incurring taxes and the IRA will own the property, you are therefore exempt from collecting any of the tax deductions that accompany owning a rental property. In addition, if the property is purchased by the IRA you are unable to pay for any repairs, maintenance, or updates to the property out of your pocket—so be sure your IRA has plenty of available funding before moving forward with this route.
Selling your Rental Property
When it comes time to sell the property, the process remains relatively the same. You would list the home on the market and wait for a buyer to make an offer. If you accept the offer as is, you would move forward; if not, you simply negotiate as you would with any other real estate holding. Once everyone has agreed upon a final price and any additional terms, then the process begins to differ. Instead of acting on your own behalf during a closing process, the IRA’s custodian handles the remaining process, selling the property on behalf of your IRA. When the sale processes, the money would simply be placed back into your IRA. Depending on your IRA’s form, it will either be tax-deferred or completely tax free.
While it may sound complicated at first, buying a rental home using an IRA is actually much easier than you would think. As the process legally has to be handled by a custodian, you don’t have to worry about the ins and outs. All you have to worry about is researching and vetting the person or financial company you opt to use as your IRA’s custodian and they will take it from there.
When looking into rental properties, there are many factors that lead to whether it will be a profitable venture or not. Unlike a private residence, there are more important features to a property than whether you like the look of it or not. Price, neighborhood, condition, and functionality are all at play here, along with many other factors.
A rental property greatly differs from a private residence. For starters, a rental property needs to hold up to greater wear and tear than a regular home. Rental properties are somebody’s temporary home and will be treated as such, so expensive features are not necessary here.
While these homes are generally only temporary to most tenants, there are several features that can help draw in better quality, high caliber tenants. Homes with these five features not only have a higher appeal to clients, but tend to keep tenants longer and see shorter periods of vacancy than homes lacking these qualities.
Crime rate is one thing you should always verify before purchasing a rental property. Not only can the crime rate in the area affect your rental fees and housing appreciation, but it can affect your insurance premiums, maintenance fees, and even the type of tenants you are able to find.
Rental homes in areas of high crime rate often have a revolving door of tenants, especially if vandalism and theft is a popular method of crime. In addition, houses in these areas see longer periods of vacancy as the rental demand is not high in these locales.
Rental properties need to have an appeal to a larger quantity of people than a private residence. While you may not mind commuting, the majority of tenants looking for a rental home may not enjoy the idea. To avoid being stuck with a low pool of tenant options, consider purchasing a rental property in an area that has a sustainable and healthy employment market.
When purchasing a rental property, try to stay away from remote areas that are distanced far away from hospitals, car dealerships, schools, shops, etcetera. Having a property close to the local amenities will give your property a higher rental demand, as people generally want to live close to where they work and play.
Unless you are renting an apartment or a one-bedroom home, chances are you will be drawing a majority of your tenants from a pool of families. When it comes to the most common rental type—a 3-bedroom single family home—the most common type of tenant is a family unit, generally with small children. As this is likely to be the majority of your potential tenants, you want to keep that in mind and look for properties in popular, high quality school zones.
For most parents, the make or break decision on where to move depends on a school rating. If the home is zoned for a school with low test scores and poor overall ratings, they are more likely to pass on it for a property in a better school zone. With the increase in ability to access this information, thanks to the addition of school ratings onto sites like Zillow or Homes.com, many parents won’t even take the time to look at the home if it appears to be in a less than desirable school zone.
Another reason to look at school ratings is because they are a great indicator of the condition of the neighborhood. Neighborhoods with higher employment rates, lower crime rates, and greater appreciation values are likely to have better school ratings as the funding to those schools will most likely be better than less attractive neighborhoods.
Believe it or not, parking is an invaluable feature for those wanting to find a quality rental home, particularly for those in urban areas. If a property only has street parking, fighting with neighbors and their guests for spots can be a hassle. Avoid properties with small, cramped, or steep driveways. Remember that most tenants will have at least two cars on average and take into consideration how the parking could affect those with multiple cars. Steep driveways can be difficult for those with small children, elderly residents, or those with low-sitting cars (most sports or luxury cars).
Even renters want a property with a decent amount of storage! When looking at available properties, keep storage options in mind. Does it have a garage? Attic space? How about a basement? Are the closets substantially sized or are they small with little shelf room?
In addition to being appealing for tenants, storage can actually be beneficial when it comes to maintenance of the home. As rental properties are often treated as temporary homes by the tenants, a property that provides little to no storage is even less likely to be maintained as a property that has ample storage options for tenants.
[bctt tweet=”Finding a rental property is only half the battle—keeping good quality tenants with little vacancy periods is the real struggle” username=”StrategyProps”]
While finding properties that contain these features may be a little difficult, it is important to think of these as part of your investment. Finding a rental property is only half the battle—keeping good quality tenants with little vacancy periods is the real struggle. Ensuring you have the most favorable of features in your rental property at the beginning will go a long way when it comes to having a successful investment venture.