What Is a Sale-Leaseback? A Quick Guide & 7 Reasons to Use One
A leaseback is an arrangement that lets you become a tenant in a property after you sell it. The seller releases themselves from ownership burdens, both financial and logistical, without taking on the hassle and expense of moving.
But what is a leaseback transaction used for, and what are the advantages of choosing it over other options?
The 101: What Is a Sale-Leaseback and What Can It Do?
A leaseback, or a sale-leaseback in real estate circles, is a financial option for commercial and residential property owners:
- In the commercial sphere, a leaseback provides immediate income to investors while helping businesses gain access to capital.
- For residential property owners, sale-leasebacks let you access your equity without immediately moving.
There are many reasons to use a sale-leaseback. Here are seven of the most beneficial:
1. Avoid the Cost of a Loan
When you need money and have equity in your home, you may think about applying for a home equity loan or home equity line of credit (HELOC). The difficulty with either option is that you’re taking on a loan, complete with interest and closing costs.
The interest rate on a home equity loan or HELOC is usually lower than you’d get with a personal loan or credit card. Still, if you’re already paying off a mortgage, that interest can be a significant burden. You can also expect to pay closing costs equal to about 2 percent to 5 percent of your total amount borrowed.
A leaseback isn’t a loan, so you get your equity in cash without interest charges or closing costs. And there’s no need to pay it back.
2. Get a Rapid Release of Equity
When you need to access your home equity, the situation is often urgent. Maybe you have medical bills that you need to pay right away, or maybe a primary income earner has lost their job and debts are piling up.
In these situations, if you don’t find the money to pay bills fast, you’ll fall behind and incur late fees. You don’t want to add a new loan into the mix.
A sale-leaseback program releases your equity quickly enough that you don’t need to worry about a loan. Take EasyKnock’s Sell & Stay, for example.
With Sell & Stay, you could close on your home in a matter of weeks. The purchase pays off your mortgage and you get your equity in cash.
3. Lease Payments May Be Tax-Deductible
Entering into a sale-leaseback arrangement may mean significant tax savings, above and beyond not having to pay property taxes anymore.
Many states offer tax credits to renters:
- Some states restrict this benefit to renters who meet certain age, disability, income, or rent amount requirements.
- Other states, including Massachusetts and Minnesota, offer a partial tax credit for all renters.
You may also qualify for a home office tax deduction as a renter. As long as you use a dedicated portion of your home for business, even if that business isn’t your primary income stream, you can deduct a portion of your rent. How much you can deduct depends on how much space you use for work.
4. Reduce Your Debt and Debt-to-Income Ratio
Mortgage debt can be damaging because it adds to your debt-to-income ratio (DTI), defined as the relationship between your monthly debt payments and gross monthly income.
For example, if you earn $6,000 per month before taxes and deductions and your mortgage payment is $1,500 per month, then your debt-to-income ratio is $1,500 divided by $6,000 — or 25 percent. If you also have a $1,000 car payment, your debt-to-income ratio goes up to 41.7 percent.
When you sell your home and become a tenant, you no longer have that mortgage debt. The difference is significant if you’re applying for a loan because lenders tend to see someone with a high DTI as more of a risk. By reducing your DTI, you will get lower interest rates and have an easier time getting approved for a loan.
5. Your Property Still Works for You
People use their homes in many different ways. Some entertain, many work from home, and some pursue their passions in their backyards or basements. The trouble is that sometimes, you need to free up the cash that’s bound up in those backyards and basements.
When you liquidate your real estate asset using a leaseback arrangement, you don’t have to restrict your use of the property. You get the financial benefit of selling without the logistical and emotional fallout.
6. Gain an Alternative Source for Capital
Not everyone taps their equity to cover emergency expenses. Some do it to invest in a new business.
A sale-leaseback can be a particularly attractive way of getting the capital you need:
- You’re not entering into a lending agreement. That’s a major plus because you don’t have to factor repayment into your early-stage business plans.
- Since you’re not dealing with investors, you don’t have to worry about giving up any control of your new business.
7. Use the Money to Buy Another Home
Finding cash can be frustrating when you’ve spent years building up equity in a home. With a sale-leaseback, you can liquidate your equity into cash for a down payment.
Having cash in hand will give you more options of homes you can afford, and it might even let you put down enough that you can avoid having to pay private mortgage insurance.
That’s the idea behind MoveAbility, another program from EasyKnock. With MoveAbility, you sell your home to EasyKnock and use the cash from that transaction to finance your next home purchase. Through it all, you stay in place as a tenant, and when you’re ready, EasyKnock will sell your home on the open market.
What is a sale-leaseback, if not a pathway to more financial options? Whatever your reasons for needing access to equity, you’ll find that leasebacks can clear you a path to the money you need.
Tom BurchnellProduct Marketing Director
Tom Burchnell, Director of Digital Product Marketing for EasyKnock, holds an MBA & BBA in Marketing from University of Georgia and has 6 years of experience in real estate and finance. In his previous work, he spent time working with one of the largest direct lenders in the SouthEast.