How An Accidental Stumbling On Sale-and-Leaseback Scheme Opens Up New Opportunities

Several months ago, a neighbour in one of our investment properties reached out with a most interesting proposition that opens up a whole new way of thinking and approach in real estate for us.

Her question was: ‘Would we be interested to buy her apartment and allow her to lease it back for as long as she is alive or until she decides to move out?’

Now, a little background about this neighbour is warranted. Let’s call her ’M’. M is 78 years old, widowed since 5 years ago and has been living in the apartment that she and her late husband bought 13 years ago when it was spanking new.

Her apartment is similar to ours with 2 bedroom, a sizeable living room and an open kitchen, floor heating, good-size bathroom, laundry room as well as a separate storage in the basement where secured parking lots are. The apartment complex has an elevator, private terraces, modern amenities and view of a golf course. 

Intrigued, we proceeded to find out her motivation. 

While still in good health and living an active life, she wanted to access funds to explore the world and go on cruise holidays, visit friends who moved to south of France, Portugal and Spain during winter months. Being childless and from a small family, she does not have beneficiaries to leave her wealth to and figured she might as well enjoy her life to the fullest while she can. 

For that though, she needed the money that is locked in the apartment she is living in. And as property prices are going through the roof, she figured it was a good time to take profit as it may not reach such heights again. 

Her late husband used to handle mortgage matters with the bank, maintenance and upkeep, as well as dealing with the management committee. Since his passing, she found it to be an huge infringement on her life to handle financial matters, adding much stress and anxiety. With the apartment nearing its 15th year, more maintenance has been proposed by the apartment management and she wanted some work in her own apartment like a fresh coat of paint and adapting the bathroom with elderly features such as hand grips.

She was looking to sell to someone she trusts who would not need to live there, be her landlord and to take over all property ownership and management functions. Selling would also release her from negotiating a new mortgage when it would expire in 2 years.

Interesting indeed…

From our perspective as investors, this means buying over a unit with long-term tenancy by a previous owner who has kept the unit in good order, without needing to incur broker fee and generating immediate cash flow. Since we already own a unit in the same development, we are familiar with the management committee so adding a 2nd unit is not much hassle. 

After some groundwork and further negotiation, we arrived at a mutually acceptable transaction price and a lease agreement that entitled her to unlimited lease duration with annual rent increment according to national inflation rate. Due to the current shortage of contractors, we agreed to have her unit painted and the hand grips installed next year.

With such a move, she extracted the equity built up from owning the apartment over 13 years, released funds for her to do the things she enjoys while at the same time, securing her a long-term tenancy and relieving her of the responsibilities of a home and mortgage owner.  Being debt-free, for someone her generation, is important. Although the rent is slightly more than her monthly mortgage repayment including principle pay-down, she is happy and attributed the difference as the fee to secure her freedom and ‘peace of mind’ 🙂

So that’s how we ended up buying a wonderful apartment in the current tight market, without incurring any broker fees, no competition and little hassle. 

This episode spurred us on to explore other similar win-win opportunities, leading us into discussion with a 91-year-old aunt who has been living alone for the past 50 years. Her charming cottage house has not had any upgrade or maintenance since she retired 30 years ago. She is now getting too frail and weak to work in the garden, her pride and joy. She now pays a neighbour’s son to mow the lawn, trim the hedges, remove fallen leaves and take care of the plants. 

Having difficulty climbing to her bedroom upstairs, she has been thinking about refurbishing the ground floor to construct a bedroom and bathroom. However, co-ordinating the renovation would be too costly and difficult an undertaking for her.  

The idea of having some money from the sale of the house appeals to her sense of security, especially knowing that she can continue staying in the house as our tenant. An added advantage pointed out by her bookkeeper is the circumventing hefty 40% inheritance tax as a result. Weighing against the other option of selling her house and move to a retirement home, she favours the sale-and-lease-back scheme.

So, here is a snapshot of the pros and cons of a sale-and-lease-back scheme in case it is something you are interested in:

As can be seen, such an arrangement brings more benefits than disadvantages, for the right parties involved. It affirms my belief in the concept of buy-to-rent and rent-to-live.

Sale-and-leaseback scheme is deployed mostly for commercial assets such as office buildings, factories, airplanes etc. Its application for residential property has been driven mostly by retirees and those who needed cash to tie over an unforeseen situation like retrenchment. Selling one’s property in the latter instance gives access to money that can cover living expenses and buy time to make the next move without causing additional stress by being displaced and having to move at a stressful moment in life. 

This strategy offers an ideal solution to the current tight market supply and is in line with our philosophy of taking into account megatrends when investing. The silver economy is one that will become increasingly important over time and being able to offer solutions in this space will be valuable.

The point worth highlighting is the possibility that the Seller/Lessee may run out of money. However, such a scenario is also plausible if one continues owning and living in the property. That is why I strongly advocate building additional income stream, especially so if one is planning to retire based on the widely practised 4% withdrawal strategy. Because of new circumstances, it is a strategy fraught with landmines that can blow up your retirement.

Creating multiple income stream is not only sensible but the safest way to guard against outliving one’s finances. And the financially savvy Seller/Lessee can even invest some of the proceeds from the sale of the property in dividend stocks/ETFs, REITs or bonds to cover ongoing rental cost. 

Whoever said ‘you can’t have your cake and eat it too’ has not come across sale-and-leaseback scheme. Seriously worth considering if both parties can reap benefits from it. 

 

Keep learning,

Savvy Maveric

 

Disclaimer: The views expressed here are drawn from my own experience and do not constitute financial advise in any way whatsoever. Nothing published here constitutes an investment recommendation, nor should any data or content be relied upon for any investment activities. It is strongly recommended that independent and thorough research is undertaken before making any financial decisions, including consulting a qualified professional.