REInvest Group Blog

Finally!  A break for those of us complaining that First Time Homebuyers are snapping up all the incentives.  Congress ultimately reasoned that it makes sense to apply stimuli elsewhere in the economy.  Hello, Move Up Home Buyers!  Those of you who have owned their current homes at least five years will now be eligible for tax credits of up to $6,500.

First-time homebuyers — or anyone who hasn’t owned a home in the last three years — would still get up to $8,000. To qualify, buyers in both groups have to sign a purchase agreement by April 30, 2010, and close by June 30.

First-time homebuyers have been getting tax credits of up to $8,000 since January as part of the economic stimulus package enacted earlier this year. But with the program scheduled to expire at the end of November, legislation was passed to extend and expand the tax credit to include many buyers who already own homes.

Both  tax breaks, totaling more than $21 billion,  were included in a bill extending unemployment benefits for those without a job for more than a year.  In explaining the rationale for the Bill’s passage, Sen. Max Baucus, D-Mont. said, “we are still in a world of economic hurt, and Congress must continue to act boldly and creatively.  With the right mix of tax breaks and investments we will get through this recession and get folks working again.”

The real estate industry has been pushing to extend and expand the housing tax credit. About 1.4 million first-time homebuyers have qualified for the credit through August. The National Association of Realtors estimates that 350,000 of them would not have purchased their homes without the credit.

The credit is available for the purchase of principal homes costing $800,000 or less, meaning vacation homes are ineligible.It (the credit) would be phased out for individuals with annual incomes above $125,000 and for joint filers with incomes above $225,000.

One of today’s soundest investments is never touted in financial-services ads. The reason: Wall Street wouldn’t make any money off it.  Since 1974, Americans have had the ability to use IRA assets to buy investment property. Yet the means to do that — called a self-directed IRA — remains one of the least known and unheralded investment vehicles in the vast financial marketplace.
With foreclosed homes selling at dimes on the dollar, residential real estate is a bargain for investors holding cash. And if they can put 30% down, IRA investors will find specialty lenders eager to help them leverage their retirement savings with mortgages on rental properties.
The U.S. housing market may not yet have hit bottom, but the winds appear to be shifting. Existing-home sales are on the mend in hardest-hit markets and foreclosure-avoidance programs are expected to stem the rising inventory of bank repossessions, meaning the window to buy at rock-bottom prices could close before the year is out.
Remember, homes purchased with IRA funds can’t be used for personal purposes. Doing so risks the IRS declaring the assets withdrawn and demanding immediate payment of income taxes and penalties on the entire account value.
Still, as an investment readily understood by anyone who’s been through the home buying and selling process, purchasing a steeply discounted property that can produce annual income of 10% and more is a low-risk strategy for uncertain times — especially for retirees whose fixed-income investments are paying paltry yields right now.
Here five reasons why an IRA based  real estate investment is a wise move today:

1. A solid alternative to stocks. When economies teeter, investors often run to hard assets such as gold.  Yet gold’s value is measured not only in ounces but also in the intangible fear that surrounds its price spikes.
When it comes to hard assets, there’s perhaps no greater shared sense of value than for land and a dwelling.  And in U.S. history, there’s never been such a fire sale on our housing stock.
The Great Depression exacted a heavy toll on home values, but there was nowhere near the inventory flooding the housing market as in the past year. The reason: A collapse in home prices, not stocks, triggered this meltdown.
Of course, some would say foreclosed-home buyers capitalize on others’ misfortune. But the sooner we clear the massive, nationwide inventory of unsold homes — which many economists argue is a key to recovery — the better off we’ll all be.
2. Well-suited for long-term investors. Even in the best of times, the stock market looks out six months to a year. Right now, even seasoned pros can’t feel the bottom of the muck we’re in.  Many retirement savers are uncomfortable with their nest egg tied up largely in stocks. That’s just the direction where the system of IRAs and 401(k)s — which also advances Wall Street’s interests — shepherds them.
Real-estate cycles generally run in decade-or-so swings and this one may not yet have neared its bottom. Housing values could drop another 10% to 20%, but the stock market also could drop further and take a decade to recover.  For those in or near retirement, buying a property that produces rental income that’s likely to increase with inflation is a sound a long-term investment.
3. Significantly undervalued asset. For investors willing to hang on to a property for five years or more, residential real estate today presents a tremendous opportunity to do just what investors ideally do — buy low and sell high. In some of the hardest-hit markets, homes are selling for just $75 per-square-foot, that’s about a third of the new construction cost for a single-family home.  An IRA buyer in that case would get a relatively new house that would require little maintenance … substantial upside (in terms of appreciation) when the real-estate market finally recovers.
4. A steady income generator.  At a time when companies are slashing stock dividends at record rates, retirees can’t be assured of that income source. And with government bonds paying a pittance in terms of yield, that fixed-income stream is running mighty shallow.  Income from a rental property bought with a self-directed IRA flows back into the retirement account. The IRA holds title to the property and the income it produces can be directed into all manner of investments typically held within an IRA.  On a percentage basis, that income can be two to three times higher than today’s fixed-income offerings even after paying expenses such as property taxes and insurance. Meanwhile, the account holder can eventually reap the potential appreciation of the underlying asset (the property) that the IRA owns.
5. The ability to flip real estate with no tax bite.  Proceeds from selling an IRA-owned home roll back into the IRA without facing capital-gains taxes. To the contrary, an investor who buys and resells a property within a year with non retirement funds faces ordinary income taxes.
So, you are left with the question, what will yield a better return in the next five to 10 years — taxable securities, or a modest rental home in a decent school district — selling for 30 cents on the dollar — whose value may soon be juiced by record-low mortgage rates and unprecedented tax breaks?

See related article here.