Creative Financing

The hackneyed expression "creative financing" has come to mean many things, often distilling down to little more than a risk transfer without full disclosure. Consider the baby boom, the care of their aging parents and the major income and estate tax benefits associated with single family residences.

The combination of these market forces and the life estate can keep very considerable investment benefits within a close family. If one can surmount the macabre necessity to include life expectancy in an investment equation, a number of profitable alternatives present themselves. A skilled investor working with an estate planning attorney can capitalize on these tools.

Another alternative is the reverse amortization mortgage (which may also be provided by a family member although without some of the more important tax benefits). These instruments make payments to the borrower during his lifetime. The size of the payment is dependent on the value of the property at various points in time, a maximum loan-to-value (LTV) ratio and the presence or absence of a growth assumption. In the graphic above three examples are presented. data1 dominates as it allows for both growth and a high LTV. data2 (high LTV but no growth) and data3 (low LTV with growth) are more interesting as the higher payment is determined by whether the borrower's life expectancy exceeds ten years.