If you invest in real estate, I sure hope you’ve been following the Stimulus bill as it makes its way through Congress. Yesterday President Obama signed into law The American Recovery and Reinvestment Act, and it contains a provision that could help a lot of investors. Here’s how CNN described the provision I’m talking about:
Homebuyers: First-time homebuyers who purchase this calendar year get an $8,000 tax credit which does not have to be repaid like a similar measure last year. This phases out for people making more than $75,000 individually or $150,000 jointly. “First-time homebuyer” is defined as someone who has not owned a home for the past three years. Cost: $6.63 billion.
You should be aware that buyer’s will have to repay the credit if they sell the home within three years. Otherwise, they never have to pay the money back. Now that’s a big benefit for first-time homebuyers, but it’s also a big benefit to real estate investors. Let me give you some background into our investments, and then I’ll explain how we intend to use the first-time buyer tax credit to our advantage.
As we’ve written before, Mike and I invest in single family homes located in the mid-West. All of our homes we currently own were purchased from HUD. The deals we’ve gotten range from good to great. Our last investment is a perfect example.
Last year we bought a three bedroom one bath home on a slab for $41,000. The home is in a good school district and a reasonably safe neighborhood. It’s on about .2 acres with a fenced yard and carport. We put about $23,000 into the home. This included painting the house inside and out, a completely new kitchen and bathroom, and a lot of other cosmetic work. With a total investment of about $65,000, we have a property worth $90,000 to $95,000.
Our original intention was to flip the property, something we never do. All of our other homes are on a lease purchase deal, which I’ll explain in a minute. For our new property, we put it up for sale with a broker, and it just sat there. Like so many other properties on the market, we got little interest from potential buyers. But we did get somebody interested in a laease purchase deal, which we ended up taking. Here are the terms:
Lease-purchase fee: $2,400. This fee is non-refundable, but is credited against the purchase price of the home if and when the tenants exercise the option to buy.
Purchase price: $94,900. We always set the purchase price at the high end of the market, but never above what the comps will support.
Term: 3 years. The tenants have three years to excersie the option, and the purchase price never changes, even if the market goes up (or down for that matter).
Rent: $1,045. We often include a yearly rent escalation clause in our long term agreements, but we didn’t here.
Rent Credit: $100. Every month the tenants pay rent on time, they get a $100 credit toward the purchase price of the home. That means that over three years, they can earn a credit of $3,600. Add to that the lease-purchase fee, and they have a $6,000 down payment on a $94,900 home.
We financed all but $3,000 of the total cost of the home, over a 20 year variable rate loan that adjusts once every five years. Our current interest rate is 7.5%. So even with a 20 year note, we have immediate cash flow of about $300 less maintenace costs.
So let’s get back to the tax credit. Assuming our tenants would be first time home buyers and have income within the allowable range, they qualify for an $8,000 tax credit if the buy a home before Decmeber 1, 2009. Simply put, they have every reason to buy now, if they can.
So our plan is simple. We are preparing letters to each of our lease-purchase tenants laying our the terms of the tax credit and how it would affect the purchase of the home. We also have mortgage brokers they can talk to as well, if they’d like. The key here, however, is to get the letters out now so that the tenants have time to think about their decison and to do the necessary planning if they indeed want to buy.
The first time homebuyer tax credit really does offer a great opportunity for buyers. And we think many of our tenants will want to take advantage of it. If they do, we end up selling the property without a real estate agent fee for a fair price. We can then do a 1031 exchange into a new property that, in the present market, can be had for a great price.