I own a home in Colorado where I always planned on retiring, but now I am not moving back. I bought it for $200,000 and it was, at the height of the market, estimated at $620,000. It has been a rental since 2004 when I was deployed, then transferred.\u00a0<\/p>\n
The couple renting it are interested in buying, given that prices are falling. Could I be the lender? How would that work? Also, would my capital-gains taxes on the sale be based on the entire sale price? And how would a mortgage payment be taxed?<\/p>\n
I wouldn\u2019t want a loan to last 30 or even 20 years, but 10 years of steady interest payments around 7% seems like a pretty good deal to me.<\/p>\n
Landlord\u00a0<\/p>\n
\u2018<\/em><\/strong>The Big Move<\/em><\/strong>\u2019 is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.<\/em><\/strong><\/p>\n Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Aarthi Swaminathan at <\/em><\/strong>TheBigMove@marketwatch.com<\/em><\/strong>.<\/em><\/strong><\/p>\n It\u2019s nice of you to offer to sell your home to your tenants. It shows a mark of a good landlord-tenant relationship, and since you\u2019ve known them for nearly two decades, the arrangement discussed likely came out of a good place.<\/p>\n For the buyer, there are several pros: they don\u2019t have a minimum down payment, there are fewer regulations, and it can provide an avenue for homeownership for people without a high credit score.<\/p>\n And for the seller? You could save on closing costs, and could arrange for the buyer to pay the property tax, and homeowners insurance and other costs of upkeep. There may be a \u201cballoon payment\u201d due at the end of the process. <\/p>\n With such huge financial transactions, however, it\u2019s not advisable to overlook the reasons why a traditional mortgage route would be preferable.\u00a0<\/p>\n Having them take out a mortgage will a) allow you to have more financial freedom by having access to the cash up front versus being paid over a decade, which may be useful in multiple scenarios, and more importantly, b) protect you in the event that your tenants miss payments, or worse, completely stop them, and c) enable these tenants to refinance at a lower rate if they do decide to lock into an interest rate at close to 7% or 8%.\u00a0<\/p>\n Arrangements such as the one you\u2019re describing are regarded as \u201cseller financing\u201d or \u201cowner financing\u201d where the homeowner \u2014 not the bank or the mortgage company \u2014 is the lender and the buyer pays you monthly.<\/p>\n Related:<\/strong> Some home sellers are offering to pay their buyers\u2019 mortgages. What\u2019s the catch with \u2018seller financing\u2019?<\/p>\n More commonly seen in investor deals, such a deal could make sense if you were not in immediate need of the cash, and have the appetite to take on the risk of your buyers defaulting on the payments.\u00a0<\/p>\n Some other questions to think about in the meantime: What else could you do with the money if you decided to sell your property the traditional way? Could you invest it elsewhere and ensure your retirement funds grow? Can you use that significant chunk of cash to fund some other dream?<\/p>\n You may think<\/em> you know your tenants well, but what if an emergency arises and they stop their payments? You would need to foreclose on the property, or pursue other legal means. Do you have the stomach to deal with all of that? A mortgage lender has the resources to deal with forbearance and delinquency.<\/p>\n If you go this route, consult a real-estate attorney to make sure the deal is rock-solid \u2014 from running a credit check on your tenants to checking their income, job security, and professional and personal references. Like a traditional lender, it would obviously be wise to hold onto the property\u2019s title until the tenants pay off the loan.<\/p>\n After calculating and paying capital-gains tax on the sale, you will need to pay tax on your annual net income after depreciation, maintenance and other costs, said Nick Aiola, owner and CEO of Aiola CPA.<\/p>\n It may feel like the right thing to do for your longtime tenants, but ultimately is this the right thing for you? If they break your trust and stop paying you, you\u2019ll be left high and dry. For that reason, formalize the transaction, legally, rather than offering seller financing.<\/p>\nDear Landlord,<\/strong><\/h2>\n
Advantages of cash upfront\u00a0<\/strong><\/h2>\n
Seek professional advice<\/strong><\/h2>\n