What do I mean by the term creative financing? According to Wikipedia, In real estate, creative financing is non-traditional or uncommon means of buying land or property. The goal of creative financing is generally to purchase, or finance a property, with the buyer/investor using as little of his own money as possible, otherwise known as leveraging, OPM (Other People's Money).
Let’s look at a few options why a homeowner may consider a non traditional method for selling their home.
- We all hate paying taxes to the government - seller financing can reduce and even eliminate taxes to be paid on the sale of a home
- Generating passive income.
Before we dive into the benefits, please consult your financial advisor and or accountant before working with a buyer interested in seller financing.
Let’s look at a traditional sale of a home: depending on your income bracket, a homeowner would be responsible to pay anywhere between 15-20% on the gain. After expenses, if you were to net $100,000, at a rate of 18%, $18,000 would be paid in taxes. With seller financing, the owner and buyer negotiate a down payment, the payment, usually much smaller would be taxed. For example, if the buyer made a down payment of $20,000.00, the capital gain tax at 18%, would total $3,600.00.
Moving on to the more exciting benefit: generating passive income. If you sold your home for $100,000.00 and a down payment of $20,000 is agreed upon, the balance on the loan is $80,000.00. The loan is amortized over a 30 year term, at 5%, $222.00 would be paid towards the principle, and $257.00 in interest would be paid monthly. Not only do you have $20,000 in your bank account to take that long needed vacation or put down towards a new home, but you will continue to receive interest payments monthly in the amount of $257.00! I have some even more exciting news: with a 1031 exchange, if you rolled the $20,000 into a new home, you can avoid paying capital gains altogether!
If you're a bit apprehensive, in the event of a default, you, the seller, keep the down payment, you made additional money in interest, and you keep your home! Please contact me with any questions, I look forward to speaking to you!