Converting Real Property Into Income

Watch: Access to Care

To pay for cancer treatment, you may need to consider borrowing against or selling real property to create income. The laws that cover home loan, sale and rental transactions are complex and change frequently. Talk to a real estate agent, financial planner or other professional knowledgeable about real property and tax planning.

Talk with family and close friends. There may be other options to help you obtain more money, such as a personal loan or the sale of something you own. Also, there may be financial assistance through a variety of government or nonprofit programs. For example, some programs help people obtain health care services and/or prescription medications at reduced rates or no cost.

Learn the Costs of Selling Your Home

Make a note of the cost involved in selling a home or establishing a home equity loan or line of credit. Some lenders, such as large consumer banks, may waive some or all of these closing costs:

  • The expense of a property appraisal to establish the value of your home.
  • An application fee that may not be refunded if you are denied a credit line.
  • Point charges made up front (one point equals one percent of the credit limit).
  • Fees for closing costs, including attorneys, title search, mortgage preparation and filing, property and title insurance and taxes.
  • Fees charged during the plan period, such as annual membership or maintenance fees and a transaction fee every time you borrow on the credit line.

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The following is an overview of methods for converting real property into income.

1. Sell Real Property

Based on how much your real property is worth, consider whether to sell through a real estate broker/agent who can help you with complex legal issues. Before you make the decision to sell, consider:

  • If you do need to sell quickly, you may get much less than the property is worth. Ask a real estate professional about the average selling time for a house in your area.
  • Buildings that need repair and/or renovation may not sell for what they’re worth. Consider the value of putting in some time and money to improve the appearance of your property before listing it for sale.
  • Laws regarding tax breaks and capital gains tax exclusions may apply to the sale of your home. A financial professional, such as an accountant, can explain the specific tax consequences of selling both your home and other property you own.
  • The value of real property is usually based on factors such as the following: location of the property, age and condition of the property, defects of the property that must be fully disclosed to the buyer, debts or liens on the property that may affect the sale, average per square foot rate of the properties in the area in which your property is located, furnishings and amenities that come with the property and supply and demand of houses in your area.
  • Getting an appraisal of the value of your real property will help you set a realistic selling price. Compare the appraisal to the selling prices of similar houses in your area. You can obtain information about the sales prices at no cost from local real estate companies.

2. Sale-Leaseback Arrangement

In a sale-leaseback real estate transaction, the seller of a home immediately rents it back for a specific period of time. You sell your house to someone else but continue to live in it as a tenant. The buyer takes over the cost of maintaining the home, paying the taxes and possibly even utilities. The advantages: you continue to live in the house and receive quick cash from the sale while giving up maintenance of the property. On the other hand, you no longer have rights of ownership and you become a tenant to the new owner.

Before you make the decision to enter into a sale-leaseback arrangement with your home, consider:

  • This type of arrangement usually involves selling the real property to a family member or friend. The process still must be handled through proper legal channels.
  • Watch out for foreclosure rescue scams. For example, a questionable lender might ask a homeowner to surrender the title and in return the homeowner can remain in the home as a renter and repurchase the house over the next few years. Some of these deals have bad interest rates and terms that make it impossible to buy back the home later.
  • Avoid getting involved with deals that sound too good to be true. Consult with an attorney to identify options and risks before

3. Home Equity Conversion

If your house is worth more than the mortgage amount you owe on it, then you are said to have “equity” in the home. Equity is the value of the difference between what you owe on the house and what it is currently worth on the market. For example, if your home is worth $200,000, and you owe $120,000 on your mortgage, then your equity is $80,000.

If you have equity in your home, you may be able to borrow money using your home as security. Options:

  • With a home equity loan, you receive money in a lump sum. This has to be paid back over a period of time, so each monthly payment by the borrower goes towards both the principal (the amount borrowed) and interest. Most home equity loans have a fixed interest rate for the life of the loan.
  • A home equity line of credit lets you write checks as you need the money, up to a pre-determined amount. This is similar to a credit card line of credit because the borrower can use as much of the lender-approved line of credit funds as they want and monthly payments only have to cover the interest. The home equity line of credit offers more flexibility to the borrower and can serve as a form of an interest only loan, but there is usually a variable interest rate.

An advantage to a home equity loan or line of credit may include having an interest rate lower than credit cards and unsecured personal loans. The interest paid on your home equity loan is also an income tax deduction. In addition, a lender cannot take your health condition or life expectancy into consideration when deciding whether to grant this type of loan.

Before setting up a home equity loan or credit line, consider:

  • If you cannot make the payments, you could lose your home.
  • Credit lines may have variable interest rates, so loan payments can increase over time.
  • If the value of your home goes down, you may end up owing more than the house is worth.
  • The terms of some loans may specify that you cannot lease your home to others.
  • Depending on the term and rate of the loan, paying off the equity loan could take longer than the original payment schedule and end up costing you more.

If you decide that a home equity loan or line of credit is a good option for you, contact both local lenders and national lenders, and compare the terms of at least three different lenders.

4. Traditional Second Mortgage Loan

A traditional second mortgage provides a fixed amount of money to be repaid over a fixed period of time, usually with equal payments that will pay off the entire loan. The term (contract period of time) of both types of loans is anywhere from 15 to 30 years. The APR of a traditional second mortgage loan is typically fixed and all funds are paid at closing.

Compare the expenses and benefits of this type of account to a home equity line of credit before making your decision. Include fees and other charges, as well as the APRs.

5. Mortgage Refinancing

A mortgage is another name for a loan used to buy a house. If you owe money on your house, you may be able to arrange for a new mortgage loan with your original lender. This is called refinancing. By doing this, you may be able to lower your monthly mortgage payment and free up money in your budget for other needs. A bank will look at your credit rating. However, the bank is not allowed to consider your health condition.

A “cash-out refinance” is another type of mortgage refinance arrangement that can be used by property owners. This type of refinance might be considered if there is a large amount of debt or they need to pay a major expense. In this case, the primary residence is refinanced for a new mortgage amount that is larger than what is actually owed on the current mortgage. The extra cash that is received can then be used for debts and expenses, such as medical bills and credit card balances.

Talk to a financial professional and/or a tax expert about:

  • The interest rate of the loans available.
  • The amount of your monthly payment.
  • The costs involved in obtaining the loan.
  • How long you will have to continue to make payments on the loan.
  • The amount of your monthly payment that you could deduct from your income taxes.

6. Life Estate Arrangements

With a life estate arrangement, you sell your house but are allowed to live in it for the rest of your life, usually without paying rent. The parties decide the terms of the arrangement, such as who will pay for the maintenance and upkeep of the house.

As with sale-leaseback arrangements, a life estate arrangement is usually made with friends or relatives, but should be set up through proper legal channels. This protects both you and the buyer. Before entering into a life estate arrangement, both you and the buyer should talk to an attorney about the tax implications of the arrangement.

7. Reverse Mortgage

Reverse mortgages are available to people age 62 or older. With a reverse mortgage:

  • You receive money from the bank as an income stream, a line of credit, a lump sum, or a combination of these methods.
  • If you die, the house is sold to pay off the debt (the income you received plus interest). If you sell the house, the proceeds are used to first pay off the loan.
  • You do not need a salary or other income to qualify for this type of loan, as the lender only considers the value of the house, not your ability to repay.
  • Generally, the legal obligation to pay back the loan is limited to the value of the house. This is called a “non-recourse loan.” A traditional loan requires that you make monthly payments until the debt and interest are repaid.

Keep in mind the disadvantages of setting up a reverse mortgage loan. For example, it is possible to outlive the loan value of the house and end up with no more income. In addition, the lender gets the advantage of any future increase in the value of the property. If you have to move, the house must be sold to pay off the debt and you cannot leave the home to your heirs or rent it out. Other things to consider:

  • If the interest rate on the loan is adjustable over time, will rate changes affect conditions of the loan or the length of time your receive money?
  • If your house is sold for more than the amount owed on the loan, does the lender share in the profit?
  • If the program is not FHA insured, and you will receive future payments, how sound is the lender's financial status?
  • Is mortgage (credit) life insurance available to pay off the debt and leave the house for your heirs?

If you apply for a reverse mortgage, seek information from an FHA-approved reverse mortgage counseling agency. These agencies have no financial investment in your decision and will give you detailed information on the advantages and disadvantages of obtaining a reverse mortgage.

The U.S. Department of Housing and Urban Development (HUD) sponsors housing counseling agencies (Home Equity Conversion Mortgage Counseling Network) throughout the country that can provide advice on various housing issues including reverse mortgages. Also, check with a professional adviser who does not have a financial interest in the loan, such as your financial planner, lawyer or accountant.

8. Get Renters

You can rent out part of your property or your entire house while you live somewhere else. Make sure that what you charge renters also takes into account the expenses of maintaining the house and that the rental agreement states who is responsible for repairs and maintenance of the home.

To find a renter, list your home with a real estate broker or brokers, or try to rent it yourself. To determine how much rent to charge, contact several real estate brokers in your area to identify the current rental rates are in your area. You can also check your local newspaper or websites for similar rental property to see how much others are charging.

Consider hiring a property management service that will help you to rent out the property, collect rent payments from the tenants and oversee the general maintenance of the property. This type of property management service will charge a fee which is usually a percentage of the monthly rental price.

Before opening your home or property to renters, check your insurance coverage to be sure that it covers liability for anything that happens to your tenant and his or her guests (and to their personal property). Remember to also take into account the impact that renting your home to someone may have on your tax situation as well as on any benefits you receive (such as Medicaid).

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Works Cited

"Dreams Foreclosed: Saving Older Americans from Foreclosure Rescue Scams." ConsumerLaw.org. Consumer Concerns for Older Americans. National Consumer Law Center, Inc. Boston, MA. 27 November 2006.www.consumerlaw.org

"How to Evaluate a Home's Resale Value" and "How to Decide if You Should Sell Your Home." Ehow.com. eHow: How to do just about everything. 27 November 2006. www.ehow.com

"HUD Approved Housing Counseling Agencies" and "Find a Housing Counselor." Homes & Communities. U.S. Department of Housing and Urban Development. 24 January 2007. www.hud.gov

Landay, David S. Be Prepared: The Complete Financial, Legal and Practical Guide to Living with Cancer, HIV and Other Life-Challenging Conditions. New York: St. Martin's Press, 1998.

Petersen, David, Seminar: Financial Planning for People with HIV/AIDS, New York, 1994.

"Pros and Cons of Debt Equity." Bankrate.com. 28 November 2006. www.bankrate.com

Quinn, Jane Bryant. Making the Most of Your Money. New York: Simon & Schuster, 1991.

"Sale-Leaseback Lenders Defy Regulation." Consumers Union.org. Nonprofit Publisher of Consumers Report. 27 November 2006. www.consumerunion.org

U.S. Department of the Treasury. Internal Revenue Service. Publication 523: Selling Your Home. Washington D.C: IRS Individual Forms and Publication Branch, 2006.

"When Your Home Is On the Line: What You Should Know About Home Equity Lines of Credit." Pueblo.gsa.Federal Citizen Information Center. 21 November 2006. www.pueblo.gsa.gov

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