January 2024 Report on the Real Estate Market
From Your Friends at Northwest Atlanta Properties
Atlanta Is A Top Housing Market
Zillow recently cited Atlanta’s affordability and job growth as two factors making our market one of the top markets for 2024. It is no surprise to us as we have seen our areas booming with building and new businesses springing up. We are winning the competition for these businesses and jobs over cities in California and Florida primarily because of our housing affordability. In 2021 and 2022 we saw 15,000 residents move to Georgia from California, 11,400 from Florida and 7,700 from New York.
Here are some interesting charts recently – we believe that the 2 most critical statistics to follow are related to supply and demand. On the supply side its inventory available and on the demand side it’s the interest rates. The chart below shows that rates have dropped almost 1.5% in the past two months – a pretty stunning reversal from 8%+ rates and unexpected in that many economists expected rates to actually increase.
On the supply side the national chart below shows that we are well below the average number of homes for sale at the end of 2023. In fact the lowest non-pandemic levels we’ve seen.
So, demand is up, and supply is constrained. What should you do?
We believe 2024 will be the year of 5’s. High 5’s for interest rates. Number of sales up significantly to over 5 Million nationwide and appreciation to be around 5%
If you’re looking to buy and live in a home for a few years (meaning you can afford the home) – real estate has proven to be the great long-term builder of wealth.
If you’re thinking of buying a property that will give you cash flow this is a great time to invest and get solid cash flow (we’re seeing about 6% for our investments) and enjoy the other tax benefits of owning investment real estate.
One of the advantages of Northwest Georgia is that jobs and businesses are booming, new construction is happening, and all of these positive factors are expected to continue for years.
Your Local Market Report – because it’s all Local
The snapshot of “Year over Year Price” we have a surprisingly rising market with home values up just under 5% % in the areas we love to work in.
As always for the best information for YOUR home let us prepare a professional pricing analysis for your property – as you can tell from the chart above each zip code (and school area) has a unique, definable valuation
We’ll use our actual experience and intelligence to determine your property’s value. In this rapidly fluxing market this is critical.
We are happy to spend a few hours putting a professional pricing and equity analysis together for you and your unique property.
Property Management Question we are often asked:
How do I find the money to buy an investment property?
One of our clients has used Self-Directed IRA’s to buy a half dozen plus properties here in Georgia over the past ten years – gaining over $1,000,000 in equity and getting steady monthly rental income. Here’s a similar story:
Case Study: 5 Steps to Buying a Rental Property with a Self-Directed IRA
Julia (who asked that we not share her last name) decided to use the majority of her retirement account funds to buy a rental property.
“The 2008 crash was a wake-up call. Leaving retirement savings in the stock market and hoping for the best seemed risky.
“Now real estate was something tangible; something I understood much better than the financial markets. The returns are based on the local market driven demand for housing.”
Julia it was time to diversify. They followed these steps to buy a rental property with an IRA.
1: Find a Custodian
With a self-directed IRA, you need a custodian or trust company to administer it for you and comply with IRS rules.
“The first thing we did was find a trust company that would agree to handle it. The trust company ‘manages’ the IRAs for me. I set up IRAs with them; they then invested where I told them to invest.
“It’s important to understand the relationship with the trust company – they make their money by charging a percent of the value of the trust. And you need to be careful what you are signing up for! It’s a long-term relationship with that company and a serious financial commitment.”
I asked Julia about her tips for other real estate investors thinking about a self-directed IRA, and which trust company she used. “I guess the most valuable tip is to shop for a trust company before you start looking at properties or making investment decisions. The choice of a custodian is important and should not be part of the rush or timeline when buying a property. We can help you find one if needed.
You sign up with a trust company, they create the self-directed IRA for you, then you rollover some or all of the money from your existing IRA, 401(k), or other tax-deferred retirement account to your new self-directed IRA. It’s relatively easy; they give you a form to fill out and you transfer the funds.
2: Set Up a Company to Invest Through
Own your properties in an LLC? It’s basically that simple.
“I set up an LLC for the purpose of owning and leasing real estate.
“Setting up the LLC is pretty straightforward. We had a law firm help fine tune the language of the operating agreement.” It’s worth noting that many people form LLCs on their own, depending on their level of comfort.
You file Articles of Organization with your state’s business licensing administration.
“Then I set up a bank account, got a tax ID number and I was in business! The trust company can then cut the checks to buy the property.”
To recap: you open an account with a trust company to create a self-directed IRA, and transfer money to it. Then you create an LLC to buy the rental property under, so that your self-directed IRA has something to invest in!
3: Finance a Rental Property in a Self-Directed IRA
Julia did not finance the rental property she bought in her self-directed IRA; she paid cash.
But that doesn’t mean you can’t use financing to buy rental properties under your self-directed IRA.
Borrowing money to buy real estate in your self-directed IRA is nearly identical to borrowing otherwise. You secure a loan, either from a mortgage that does landlord loans or from a private lender (whether a company or individuals, such as friends or family).
But if you do finance your rental properties in a self-directed IRA, there are two important points you need to understand:
First, to finance investment properties bought under a self-directed IRA, the loan must be a “non-recourse” loan. That means the borrower is not personally liable for the debt: the lender can only go after the collateral — the rental property — in the event of a default.
Not every lender will agree to that. Definitely a question to ask lenders early in the process, if you’re considering buying real estate using a self-directed IRA!
The second point you need to know about financing real estate in a self-directed IRA is that the property’s revenue is only partially tax-sheltered. It gets complicated quickly, but the short version is that only the “non-financed portion” of the property gets the tax benefits.
Financing Example in an SDIRA
To use a simple example, say you buy a rental property under your self-directed IRA for $300,000, and you finance half of the purchase ($150,000). The IRS only considers the half you paid cash for as the tax-free portion. So, half of your cash flow would be tax-free, and you would pay taxes normally on the other half.
Talk to your trust company about the details of how this exactly works from a year-to-year tax perspective. We are not licensed to provide tax information.
Whether you borrow money or stick to your own cash in your self-directed IRA to buy the rental property, your LLC now owns the rental property. Congratulations!
4: How Rental Cash Flow Works in a Self-Directed IRA
What happens to the cash flow from the rental property?
The short version: The tax-free rental income must stay in your SDIRA until you reach at least 59 ½, otherwise it counts as an early distribution and you must pay both taxes and penalties on it.
I’ll let Julia explain in her own words, how her cash flow works in herLLC and self-directed IRA:
“The money flows like this: I’ve hired a property management company to manage the apartments, including leasing, maintenance, collecting rents, paying bills, etc. Once per month, the property management company collects the rents and deposits the net proceeds into the LLC bank account. Icontrol that account.
“Then once per month, the LLC pays a dividend to my IRA at the trust company.”
Cash flow from the investment property goes to the self-directed IRA. Since you control what the self-directed IRA invests in (hence the name), you could use it to pay down debt on the rental property (if you have any), or invest in anything else: equities, private notes, even more rental properties!
Now, if you’re a young person not yet retired, that would be the end of the discussion. But Julia hasnow retired, and withdraws money to live on from her self-directed IRA.
“The trust company then turns around and sends me IRA disbursements once per month. The trust company does the tax withholding for the IRA disbursements and issues the 1099 at the end of the year.”
5: Keep Personal & LLC Funds Separate
“One thing we are very cognizant of is that the LLC account, funds, cash flow, etc. must always be completely separate from anything else I am doing. Funds must never, ever, ever be used by me directly or co-mingled.”
The IRS doesn’t have a sense of humor about commingling tax-protected funds in a self-directed IRA with personal funds. They will rain fire and brimstone down upon thee if you do it.
“I manage our LLC and rental property for the benefit of my IRAs. Not for my personal benefit.”
It may seem like an odd distinction, but it’s one worth making.
“I grossed $108,000 last year, and after paying all the expenses of taxes, management, maintenance, utilities, etc. I netted $63,000.”
That money went into her LLC bank account, then to herself-directed IRA, then was disbursed back out to her as retirement funds to live on. Easy peasy.
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We are grateful for your support of our family business.
Mike and Donna Stott, Jon Burke, and Matthew Stott