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Selling your house and renting it – the right way
April 4, 2016/in Blog /by Emerita Mercado
You must have heard about Conrad Black selling his Bridle Path mansion and renting it back. Yes, you heard it right! He will be paid for the sale and then pay rent to live there. This arrangement is called sale/leaseback. It is a transaction wherein the owner of the property sells that property and then leases it back from the buyer at a rental rate and lease term that is acceptable to the owner. The primary purpose of this arrangement is to raise money or to free up the owner’s equity for other uses, while retaining use of the property. This way, the seller gets the profits from the sale while keeping possession and use of the property, while the buyer is assured immediate long-term income on the property. If the property being sold qualifies for the principal residence exemption, then any profit from the sale is tax free. This arrangement makes sense for those who have built a sizeable equity in their homes as prices have increased dramatically.
Advantages of the Sale/Leaseback Arrangement:
The main advantage to this option is that you sell your property and receive the cash, which you can use how and when you wish. Whether it is to invest in other property, expand your business or pay off your debts. Another advantage is that you rent the property back from the new owner. This has the added advantage of a set rental amount agreed upon for a set number of years. When you give up your ownership rights to the property, you also decrease your maintenance costs. The last advantage you will want to take into consideration is whether the agreement you sign gives you the ability to buy back the property after the agreed rental period. This is something you must take into consideration and a huge benefit when the lease comes to an end especially when housing prices continue to rise.
Disadvantages of the Sale/Leaseback Arrangement:
While there aren’t many, you need to weigh them up against the sale and lease back advantages to decide if it is the right choice for you before going ahead. One of the disadvantages you may want to consider is that you lose certain rights to the property when you become a tenant. This includes using the property as collateral when applying for a loan, if you ever need more cash. Other disadvantages include that after the agreement, when it comes to signing a new rental agreement, you may not have any control over how much the rental will be increased. During the rental term you know what to expect, but when your years are up, you may have to consider moving to afford the rental amount. The last disadvantage is that some agreements do not offer the ability to buy the property back from the new landlord and this is a serious consideration, which can affect your objectives in the future. As this maneuver is fairly common in the commercial real estate world, it has started showing up in residential real estate deals. In most cases, financially strapped homeowners are better off getting in touch with their lenders and seeing what options are available to avoid foreclosure before entering into any kind of sale-leaseback agreements. Whether you are thinking of using this arrangement, or if this arrangement suits you, I encourage you to work with a financial planner, a real estate professional and a lawyer to review your situation and draw up the terms and conditions to make sure you are protected. This arrangement may benefit Conrad Black, however, it is not for everyone to embark on.
Emerita Mercado, specializes in trust and estate planning issues. She helps clients protect their assets by setting up family holding companies, private foundations and family trusts as a means of intergenerational wealth transfers. Emerita also collaborates with families and executives to create dynamic total wealth management solutions.
