Annuities are a popular retirement tool. They may be used to maximize retirement savings or provide for dependent family members. But did you know that you can use an annuity to buy a property? There are several different strategies, and we’ll cover each of them in detail. We’ll also address the pros and cons of each approach.
The Life Annuity
The life annuity has three elements. The bouquet is a sum paid by the buyer. It is normally thirty percent of the value of the property. The remaining balance is paid as an annuity to the homeowner. The payments are typically based on the person’s age and life expectancy. You can find out more about how annuities work here.
The property buyer will make payments to the seller minus an amount equivalent to rent. When the seller dies, the buyer gets the property. (This is called an occupied life annuity.) Then you officially own it.
The benefit of this approach is that you generally pay less for the property than it is worth, and it is likely to appreciate in the meantime. The downside is the risk that you may not take possession for decades.
The Free Life Annuity
With a free life annuity, the seller no longer legally owns the home. Instead, they receive a supplementary annuity. The property is sold as a life annuity. The seller must leave but receive annuity payments instead of a large lump sum. This allows you to take possession of the property immediately.
The biggest benefit of this approach is that you’re allowed to move in or rent it out almost immediately. And you don’t have to take out a mortgage. One of the downsides is that a large percentage of those that want to sell their home for an annuity doesn’t want to leave, so it is a limited option.
Why Do People Buy Properties with Annuities?
Many people may be unable to afford to stay in their homes upon retirement, but they don’t want to leave. If you offer them an annuity, you’re giving them the money to pay the mortgage and other living expenses while gaining the right to buy the home when they die or finally leave. This makes life annuities a long-term approach when you want to invest in real estate.
If the person doesn’t live very long, you’ve purchased the home for relatively little. Yet a judge can cancel the contract if the person dies a few weeks later. If they live another 30 years, the annuity could cost you more than the property. Just be careful when there is a couple living in the property since the surviving spouse might be able to fight for the property unless you give them a reversion pension. In this case, you now have to wait for the second party to finally leave.
There is a vendor’s lien on the property that allows the person to take back the property if you don’t make the annuity payments. Don’t agree to an annuity plan if you cannot reliably make the payments.
Regardless of your approach, you may be able to secure property with lower monthly payments than you’d pay if you bought it with a mortgage.