Investing in Distressed Real Estate in a Post-Covid World

Published on March 24, 2022

As our society moves past the Covid-19 pandemic, the rent relief and mortgage forbearance programs that were in place are coming to an end. The period of leniency and financial assistance due to the lockdown and ensuing economic downturn helped many real estate owners (both homeowners and landlords) get through a difficult time.

Distressed real estate at a glance

A sad fact of post-Covid America is that people are losing homes and landlords are losing buildings.

In the commercial realm, shuttered storefronts are a blight on downtowns. The lengthy shutdown of the travel and entertainment industries has left hotels, theatres, and retail properties whose owners cannot meet their debt payments. Office buildings suffered when tenants shifted to remote working and needed less space (if any at all).

On the residential real estate side, homeowners who lost income and could not make mortgage payments have gone into foreclosure. Compounding that is the fact that foreclosure restrictions put into place in response to the pandemic expired at the end of 2021. Property data powerhouse ATTOM (RealtyTrac’s parent company) released its January 2022 U.S. Foreclosure Market Report last month. That report showed there were 23,204 U.S. properties with foreclosure filings, a 29% increase from December 2021 and a 139% increase from one year ago.

Despite the downward trend, this has created new investment opportunities in distressed real estate assets.

Post-Covid alternative assets: distressed real estate for self-directed investors

Owners of self-directed IRAs have tremendous potential to build retirement wealth by investing in distressed properties. Real estate is the most popular alternative asset class held within self-directed IRAs, and there are many avenues to include distressed real estate in a self-directed retirement plan:

Fix & flip: Many savvy real estate investors are already engaged in the busy fix & flip market—purchasing, renovating, and reselling homes for a profit. These homes may be heading into foreclosure or are already REO (real estate owned—as in, bank owned) properties. Or they could be homes whose owners cannot afford to take on costly repairs and upgrades. Real estate investors relieve the owners of this burden by buying the house, making the upgrades to increase value, and flipping it.

Property tax liens: When an owner fails to pay property taxes, the city or county government may place a lien (a legal claim) on that property for the unpaid amount. The liens are sold at auctions as certificates that reflect the amount owed plus penalties.; the tax lien certificates are auctioned off based on the rate of interest the investors are willing to receive from the homeowner. The certificates may often be purchased for only a few hundred dollars.

The investor pays off the property taxes owed, and the homeowner repays the investor the full amount plus interest over a specified time. Individuals may use a self-directed IRA to invest in tax liens.

Investing in tax liens can be a complex transaction and as with any self-directed investment, the investor is expected to thoroughly research and understand the process and potential risks. Investopedia offers additional information on investing in tax liens.

Mortgage notes: Investors can include defaulted mortgages—another alternative asset related to distressed real estate—in a self-directed IRA. As we wrote about in a previous post, these “nonperforming mortgages” are purchased at a discount from the lender; full repayment terms are negotiated by the self-directed investor and the homeowner. Since a defaulted mortgage puts foreclosure on the homeowner’s horizon, this transaction enables the homeowner to stay in the home and make payments to the self-directed IRA that now holds the note.

We’ll be hosting a webinar on this topic at the end of the month. Register for it here.

Real estate syndicates and partnerships: Real estate syndicates are entities that invest in various types of commercial real estate. They partner sponsors (who source the real estate asset) and investors. The investors combine their human and financial resources to purchase and manage the properties. A real estate syndication could focus on investing in multiple distressed properties.

Secured real estate loans: A self-directed IRA can make a secured loan to a real estate investor or owner of a distressed property. The investor may need funds to renovate a house and flip it, bring a dilapidated multifamily property up to market-rate rental level, or develop an abandoned, vacant piece of land in a blighted area. The property can be held as collateral, and the IRA owner and borrower work out their terms (loan amount, interest rate, length of loan, etc.).

Partnering self-directed IRAs

Did you know that one self-directed IRA can partner with another to make an investment? As with syndicates, this arrangement brings more investing power to the transaction table. All parties work out the arrangements of that partnership, and share the expenses and income related to the asset.

Real estate and self-directed IRAs

Real estate can be a lucrative investment for investors who know and understand the market. All expenses related to the asset (construction, renovation, taxes, maintenance, etc.) flow through the IRA, which is the owner; the same goes for the income when the property is sold, the tax lien is paid, or rent is collected.

At Next Generation, we offer many educational webinars on all types of real estate investments and self-directed IRAs. We also offer complimentary educational sessions with a Next Generation representative, who can explain more about this and other alternative assets these plans allow. Alternatively, you can contact our office directly via email at NewAccounts@NextGenerationTrust.com, call us at (888) 857-8058, or text us at (848) 233-4076.