How To Provide Income
Once an estate is settled, there might be some money or other financial resources. What should be done with it? Well, that’s up to you! Simply put, the proceeds should be applied to your needs and the needs of beneficiaries and heirs of the estate. Hopefully, you are also planning for your future. You may want to make that money go to work for you, so that you earn money on your money or make it stretch out further. This can be especially important if someone who is unable to work is depending on those funds.
Future Income: Risk Versus Reward
A bank account can offer you a predictable return on your money. The money is likely to be available to you when you need it – and that’s the main reason for keeping money in a bank – but of course, the low interest the bank pays you in a savings account or CD is not going to change your financial situation very quickly.
Another option is to invest. There are so many ways to invest money. For example, you could potentially make significant returns over time in stocks, bonds, mutual funds, ETFs, REITs, or cryptocurrency. There is usually no contract to guarantee a profit to you, or to guarantee that you won’t lose money. The value and income from these investments can go both up and down. Volatile investments like these can be attractive parts of your long-term plan, but you might not want to invest all your money there, especially if you could eventually need this money in a pinch – your account value might be too low when you need it.
When you invest, there are ways to increase your chances of making money and minimizing your chances of losing money. A registered financial advisor can help you make decisions about how to make this money go to work for you. This professional will listen to your needs and help you tailor a plan that will take you where you want to go. I know some great financial advisors.
Income Now: YOU Become the Bank!
Of course, even though banks are paying you interest, they themselves are still making a handsome profit. This is because they are lending out your money at a higher interest rate than they are paying you in return. Their highly predictable revenue from these loans is protected by contractual agreements: their borrowers are required to pay them principal and interest on a rigid schedule.
The business of lending is not reserved for banks. Did you know that you can lend your assets to home buyers and let them pay you at a higher interest rate than even the banks charge their borrowers? That’s right: you can require a down payment, you can collect a lucrative and guaranteed interest, and when you think the time is right, you can sell your loan for cash! In the meantime, your borrower is contractually obligated to make fixed payments to you on a regular schedule. A loan servicer manages interactions, keeps records for you, and sends you tax documents. Just like a mortgage lender, your investment is secured by a house, and if your borrower were ever to default, you could take back possession of that house.
Investors At Your Service
Investors are often more aware of this financing option than the general public and would likely be your best customers. In general, investors are also more reliable borrowers than the general public: they are normally above-average managers of their own finances. Of course, you need to be certain that you trust them and that your loan to them is set up to meet your needs. They need to pay interest to someone: why not have them pay you?
There are two ways for you to issue a loan to a home investor:
- You can lend out the equity in your house when you sell it. This means that, instead of having someone pay you cash for your house in a lump sum, you accept a series of installment payments over time with guaranteed interest.
- You provide cash to investors so that they can buy a house. Then, they pay you back in installments with interest.
Over time, the interest you receive will result in significant gains. This is not being a landlord, where you need to worry about broken pipes. This is just receiving automatic deposits every month to the account of your choice.
If you would prefer to create a home loan as an investment vehicle, please let me know!
Cashing Out on Your Loan
Have you ever had a home loan where the lender changed a few months after you started making payments? This is common – your loan was sold. When you become a lender, a legal financial agreement called a promissory note is created, and another document pledging the house as security is kept on file at the county courthouse. Your legal position as lender can have monetary value to other investors – they will be willing to pay you to take over the loan contract. Depending on current market conditions, they might pay you more or less than the balance of the loan, like any other investment.
If you want to find a buyer for your loan, please reach out to me!
Potentially Save On Taxes
If a property is worth a lot more when it is sold then when it was first purchased, there could be a significant tax burden on the sale of that property. Seller-financing might greatly increase the amount of money you keep because less gain is recognized in the same tax year, especially if the property you’re selling is not a primary residence. Now, don’t ask me for advice here: a tax professional can help you decide on the best route.
Feel free to reach out to me to connect with tax professionals!
Visualize Your Income
Feel free to use the calculator below to illustrate how seller-financing a home could benefit a seller. This doesn’t include all the details, but it gives the idea. Just enter the expected sales price of a home (as the “Total Amount”) the down payment you might require from the borrower, the interest rate you plan to charge, and the number of years the borrower has to pay off the loan (the “Amortization Period”), then hit “Calculate.”
Looking at these illustrations is a different experience when someone is a lender instead of a borrower. Month-by-month, the “Principal” is the amount of your money you are getting back. The “Interest” is the amount that someone is paying you. At the beginning of the loan, it is common that MOST of the money received each month is from someone else. Could this extend someone’s budget? Notice that, by the end of the loan, it is not unusual for the principal to be extended by a factor of two or three. Would this be meaningful for someone?
Other Real Estate Investment Options
There are many, many ways to invest in real estate. We’ve only scratched the surface here. I can help you or guide you with multiple options. For anyone who is investing, it is important to understand the potential benefits and the potential risks and whether an investment is likely to meet their objectives.