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Thursday, September 18, 2008

Alt Investing: Putting Your IRA in Real Estate

The housing crisis has brought home prices way down, and the Wall Street crisis is making investors more than a little nervous. So now that mortgage rates are down, it could be an opportunity to take some of your retirement nest egg and invest it in real estate.

We talked to two financial experts on what you need to know if you're considering such a move.
Paul Burkemper, president of Burkemper Group in St. Louis, Mo., says it's important to keep tax consequences in mind if you're interested in investing your IRA in real estate.

IRA Taxes Higher Than Capital Gains
If you are swinging for the fences with depressed real estate, keep in mind that gains in an IRA will ultimately be taxed as ordinary income versus the more preferential capital gains rate.
One of the benefits of real estate investing is the tax benefits (i.e. development and depreciation write-offs). These are moot inside of an IRA.

So Convert to a Roth First
Consider converting to Roth first and using Roth money to invest in real estate for tax FREE growth. If you are betting on real estate to rebound over the long run, then this approach makes sense. And, Required Minimum Distributions are not required out of a Roth.

IRA Less Liquid
Take into consideration the illiquidity of the investment and how it might impact ability to take RMDs. (May want to consider a REIT for greater liquidity/diversification)

Use Separate IRA for Real Estate
Use separate IRAs for each non-traditional investment. Whether it be real estate or another asset, you are better off separating them out. This way if the real estate investment violates the stringent IRS rules & regs regarding self-directed IRAs, only that investment amount becomes taxable versus all IRA assets if held in the same account.

Don't Violate IRA Rules
Watch how you use/handle real estate purchased in an IRA. Caution needs to be taken to avoid self-dealing which could render entire IRA taxable and subject to potential penalties.

Examples of prohibited transactions:
If you purchase a "fixer upper" and do the rehab work yourself (or even hire a relative to do it), that is considered self-dealing resulting in a full distribution of the entire IRA, which will be subject to tax and 10 percent penalty if you are younger than 59 1/2.

If you buy an investment property in Hawaii and rent it out but stay there one week of the year, that is self-dealing.

James Cox, managing partner of Harris Financial Group in Colonial Heights, Va., suggests looking at a more diversified approach.

Buy REITS Not Real Property
If you want to get into real estate with IRA dollars, look at more efficient means to diversify with real estate (think REITs) versus lack of diversification with the purchase of real property.

Don't Buy Your Own Home
IRA real estate purchases make the investment properties ineligible for depreciation benefits, capital loss deductions and for your own personal use (so no primary residence or vacation home!)

Don't Buy a Home For Your Child
With mortgages tough to come by, parents might find themselves tempted to serve as the bank for their kids and use their IRA dollars to buy a house outright. As an investment, their kids would make mortgage payments to them. BUT, this would very likely be considered a prohibited transaction by the IRS since family members would be using the house.

It's Best as an All-Cash Purchase
Keep in mind that use of leverage is a no-no, which means 100 percent capital for the real estate purchase - no mortgage! (taxes are payable on income/capital gains on leveraged portion-UDFI)

Don't Violate IRA Rules
It's easy to short circuit the IRA through "prohibited transactions" - so, if you decide to use IRA dollars, use Roth or split your IRA so you can use a separate IRA for your real estate investments.

Source:http://cnbc.com/id/26757977

Thursday, September 11, 2008

Like commercial real estate? Lehman has a deal for you

A big part of Lehman Bros. Holdings Inc.'s plan to save itself is to spin off to shareholders the bulk of the investment bank's commercial real estate portfolio.


Would that be a gift -- or a bomb?


The commercial real estate market hasn't suffered on par with the worst of the residential real estate market's decline, but there are growing signs of weakness on the commercial side.


Lehman has been a huge player in financing commercial projects. Now it proposes to move up to $30 billion of its $32.6-billion portfolio of commercial mortgages and other real estate holdings into a new entity to be called Real Estate Investments Global -- REI Global, for short. That entity then would be spun off to Lehman shareholders and would trade publicly.


The spinoff would include the company's mortgage investments tied to California land developer SunCal Cos.


In effect, Lehman is taking a page from one crisis to try to overcome another: The firm is proposing a restructuring technique known as "good bank/bad bank," which was used by other battered institutions with real estate problems during the savings-and-loan crisis of the late 1980s and early 1990s.


The idea is to segregate worrisome assets into a subsidiary (the "bad" bank) and then legally separate it from the main company (the "good" bank).


In Lehman's case, the goal is to revive investor confidence in the firm by shearing off assets that could fall further in value.


"You're basically bringing some closure to a mess," said veteran bank analyst Bert Ely. "You've gotten [faltering assets] off your books. You're no longer on the hook and you've capped your downside."


Lehman could have tried to sell its commercial assets at a loss in the market -- as rival Merrill Lynch & Co. is doing with certain real estate securities. But Lehman has bent over backward to avoid a fire sale that would result in further balance-sheet write-downs.


From shareholders' perspective, the question is whether they would be getting something of real value in REI Global, or an investment that could collapse as soon as it begins trading.


Lehman sought to paint its commercial assets as fairly valued now, after the write-offs the firm already has taken. "We do not envision large write-downs in the commercial mortgage portfolio given the present market," Lehman CEO Richard Fuld told analysts on a conference call Wednesday.


"REI Global will own a high quality portfolio of assets, which is diversified by geography, property and lien type," Lehman said. "REI Global's primary focus will be to maximize shareholder returns by selling assets or holding them to maturity, whichever provides the greatest return."


The catch is that the good bank has to pour in capital to finance the bad bank. Lehman signaled that it would inject at least $5 billion in capital into REI Global.


The spinoff "has to have enough equity capital that it can stand alone," Ely said.


Yet Lehman's core problem has been that it needs fresh capital for itself, and has been unable to find a deep-pocketed investor to step up. The breakdown of talks with a South Korean state bank triggered the 45% plunge in the brokerage's shares on Tuesday -- and forced the firm to move up its restructuring announcement from next week.


The market's verdict on the restructuring plan on Wednesday wasn't encouraging: Lehman's shares stabilized for much of the session but finished down 54 cents to $7.25 -- a new 10-year low.


Source:http://latimesblogs.latimes.com/money_co/2008/09/a-big-part-of-1.html

Canadian Real Estate Investment Trust Acquires Quality Real Estate Portfolio from Canadian Tire

TORONTO, ONTARIO, Sep 08, 2008 (MARKET WIRE via COMTEX) -- Canadian Real Estate Investment Trust (CREIT) (CA:REF.UN: news, chart, profile) today announced it has acquired a portfolio of eight (8) retail properties from Canadian Tire (the Portfolio) for a total purchase price of $137,300,000.


Each of the eight (8) properties acquired by CREIT has been entirely leased by Canadian Tire for an initial term of 15 years at current market rental rates.


Canadian Tire has demonstrated a significant commitment to these retail locations by entering into 15-year triple net leases with escalating contractual rents over the term. Each property has been either newly constructed or significantly renovated/expanded within the past three years by Canadian Tire. The individual stores range from 54,000 to 130,000 square feet and comprise 740,000 square feet in total, on approximately 60 acres of land.

The eight properties CREIT is acquiring are located in British Columbia (1), Alberta (3), Ontario (1), Quebec (2) and Nova Scotia (1).


The properties all feature Canadian Tire's successful Concept 20/20 retail format. Three of the properties also include a free-standing Marks Work Wearhouse store on the respective site.


Stephen Johnson, President and Chief Executive Officer of CREIT, said "There are several reasons that make this a terrific transaction for CREIT. First, one of our fundamental strategic objectives over the years has been to accumulate a real estate portfolio that will deliver both reliable income, and consistent income growth, for our investors. Canadian Tire is an investment grade credit and has a market capitalization of almost $5 billion, so this transaction can be expected to deliver reliable rental revenue; and there will be consistent growth in the rental income as per the contractual terms of the 15-year lease.


Second, our focus has always been on the acquisition and/or development of high quality real estate assets. The Canadian Tire sites that CREIT acquired are integrated into well-established, existing shopping centres and/or retail nodes. In addition, each site is improved with a recently constructed or recently renovated/expanded Canadian Tire store. These properties are high-quality real estate assets and each property has great long-term potential as retail real estate. For example, one of the properties acquired is a Canadian Tire store integrated within the Dartmouth Crossing Shopping Centre in Halifax, Nova Scotia. Whereas CREIT already owns Dartmouth Crossing (50% interest), the acquisition of the Canadian Tire store is a logical addition for us as a long-term investment.


And third, given the current uncertainty in both the economy and the credit markets, this transaction is a low-risk, sound investment, yet it will still comfortably satisfy our strategic objectives. This is a very efficient way for CREIT to deploy some of our current unutilized investment capacity.


Overall, we are delighted with this transaction and we expect it will have a very positive impact for our Unitholders."


Mr Johnson added "Canadian Tire is one of Canada's great retailers. CREIT is pleased to increase Canadian Tire's presence within CREIT's high-quality retail portfolio." Canadian Tire has more than 1,170 general merchandise and apparel retail stores and gas stations and has a practice of both owning and leasing its facilities.


Canadian Tire announced in August that it was selling 12 properties (eight of which CREIT has acquired) for a total purchase price of $174,000,000 (CREIT's total is $137,300,000).


The CREIT purchase price was satisfied at closing with proceeds from debt financings secured by the Portfolio, as well as other CREIT owned properties which were previously unencumbered.


CREIT is a real estate investment trust that is dedicated to accumulating a portfolio of high-quality real estate assets, and delivering the benefits of real estate ownership to unitholders. The primary benefit is a reliable, and over time, increasing monthly cash distribution. CREIT owns a real estate portfolio in excess of 150 retail, industrial and office properties.


Source: http://www.marketwatch.com/news/story/canadian-real-estate-investment-trust/story.aspx?guid={F7B6C76D-FE0E-4B6E-B5EE-FC73948B45F0}&dist=hppr

Sunday, June 15, 2008

Prices of Oil Squeeze Homebuilders

The shoot up in oil prices are driving up the cost of construction materials which are also further eroding the confidence of homebuyers. Costs of goods like copper, steel, aluminum, concrete, bricks, asphalt and plumbing fixtures gone up and homebuilders are able to feeling the pressure from suppliers to foot the bill. In total, the wholesale price of construction materials for new house has gone up by 3.4% overall in April from a year earlier, according to the Labor Department.

"Any material which is petroleum-based or transportation-intensive will have pricing pressure during periods of rising oil prices," according to a Purchasing, Planning & Design Atlanta based company. Manufacturers are trying to push cost increases through for materials like asphalt roof shingles, insulation and carpet. For now higher oil prices are affecting consumers more than homebuilders, but this still affects homebuilders.

Wednesday, June 4, 2008

Mortgage Applications Fell by 7.8%

NEW YORK - Mortgage application volume dropped by 7.8 percent during the week ending May 16, according to Mortgage Bankers Association's weekly application survey, the MBA's application index dropped to 621.6 from 674.4 the previous week as both refinance and purchase volume declined.

Refinance volume fell by 8.7 percent during the week, while purchase application volume dropped by 6.9 percent. Refinance applications accounted for 48.2 percent of all applications during the week, compared with 48.7 percent the previous week. The index peaked at 1,856.7 during the week ending May 30, 2003, at the height of the housing boom.

The average rate for traditional, 30 year fixed-rate mortgages rose to 5.9 percent from 5.82 percent a week earlier. The average rate for 15 year fixed-rate mortgages, a popular option for refinancing a home, went up to 5.42 percent from 5.38 percent. Rates for a one-year adjustable-rate mortgage averaged 6.71 percent during the week, compared with 6.6 percent the previous week.

Wednesday, May 28, 2008

Home Prices Dropped In First Quarter

Home prices tumbled across U.S at a sharpest rate in two decades during the first quarter; national house price index fell to 14.1% in the first quarter when compared with to last year, the lowest since its inception in 1988. The quarterly index covers all nine U.S. Census divisions.

Prices nationwide are at levels not seen since the third quarter of 2004; however the index is still up 60% versus 2000. Two narrower indices set record declines in March versus the previous year. The 20 city index dropped to 14.4%, the lowest since that index was started in 2001. The 10 city index plunged to 15.3%, a record in its 20 year history. Nineteen of the twenty metro areas reported annual declines, with 15 of them posting record lows and six metro areas lost more than 20%.

Worst performance was in Las Vegas during March, dropping to 25.9%, it was followed by Miami and Phoenix. Only Charlotte, N.C., stayed above water, gaining less than 1% over the previous year. Last week, the Office of Federal Housing Enterprise Oversight said house prices fell to 3.1% in the first quarter, the largest drop in its 17 year history.

Friday, May 9, 2008

Unoccupied Houses for Sales Hit High Record

WASHINGTON - The percentage of unoccupied houses on sale in U.S have set a new record high in the first quarter of this year. The Census Bureau report showed that 2.9% of United States homes, excluding rental properties; were unoccupied / vacant and are up for sale, compared with 2.8% in the fourth quarter of 2007. It was the highest quarterly number in records going back to 1956, which works out to 2.28 million properties, up from 2.18 million in the same quarter last year, according to the report.

United States had the biggest gain in vacancy rates among home owners, climbing to 7 percent during Jan to Mar period from 6.5 percent in the fourth quarter of 2007. Vacancy rates fell in the Midwest and South, but climbed in the Northeast. The national vacancy rate, including existing and new houses, has been steadily increasing since mid-2005. The Census Bureau's report also said that the U.S. homeownership rate continued to be at 67.8% in the first quarter, down from a peak of 69.2% at the end of 2004. The housing market's five year boom is quickly becoming a faint memory, as sales and house prices have dropped dramatically over the past two years in once fast selling areas such as Nevada and California.



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