How To Access Your Home Wealth Without Debt
A home is the single greatest financial asset most people will acquire in their lives. But unlike many other asset classes, it’s illiquid—a form of accumulated wealth you can’t simply take to the store to pay for groceries. So what’s a homeowner to do if they want to access this capital—without simply going into debt?
Traditionally, you had two options for leveraging the equity in your home: a reverse mortgage, which is only available to those 62 and older who currently have no debt; or a home equity line of credit (HELOC), another form of loan. Both of these options increase the homeowner’s debt in exchange for cash, while adding additional monthly expenses. Suffice to say, these are not perfect solutions for many homeowners facing real-life financial hurdles.
There is another equity-based solution to this illiquidity problem that’s increasing in popularity, known as a Structured Real Estate Transaction or SRET.
With no monthly payments, no additional debt, and effectively no age or credit requirements, SRETs offer a solution for those seeking to translate the value of their home into cash without becoming overleveraged with debt. The main requirement is that the homeowner possesses a solid amount of equity in their property—generally 50% or greater—at which point they can potentially extract up to 20% of their total equity in cash.
It’s reasonable to wonder, how is this done, and what is the benefit to the financial institution? Simply put, by entering into a SRET you are agreeing to share in the future value of your home, without giving up your equity. Depending on the duration of the contract—typically 10, 20, or 30 years—the financial institution’s share of that appreciation (or depreciation) would vary. Therefore, if the value of your home goes up, you and the financial institution both benefit. If the value goes down, you and the financial institution both lose out.
A SRET is certainly not for everyone. If your primary interest is in capitalizing on the future appreciation of your property, it may not make sense to share in that appreciation in exchange for cash now. However, for those facing looming financial realities—significant debt, kids heading off to college, large medical bills—a SRET could offer a far better solution for acquiring cash than simply taking on additional debt. If you’ve already made major headway into acquiring the equity of your property and fall into one of these categories, we’d say that SRETs are well worth a look.