Investment in real estate or residential property is a one-time investment in the life of an individual. With advancing years, the earning capacity dwindles, and a person may well be an owner of an expensive property but have very little cash to meet day-to-day requirements. This is where real estate can be used to provide a steady income without having to move out from the familiar confines of your home. A real estate investor can give the owner of a property life estate, thus allowing him or her to continue to reside in the property until his or her death.

What is life estate?
A life estate is a form of interest in a property that allows the person with the life estate to retain full interest in the property until death but vests the legal title in another person. It is most commonly used:

• When an elderly parent wants to transfer the home to a child before their death but wants to continue to occupy the property until then.
• It is a creative deal put together by a real estate investor with an older seller who wants to pull cash out of their home but have the right to live in it until the end.

Rights of life estate holder and title holder
The holder of the life estate has the right to lease or even sell the property subject to the life estate. The tenant or the buyer gets the rights to the property only for the lifetime of the person to whom the life estate has been granted. The titleholder of the life estate has the right to enter the property for the purpose of inspection with notice and at reasonable intervals. If the life tenant is not maintaining the property, is doing something to mar the value of the property, or is causing irreparable and permanent damage to the property, the record holder of the life estate can even sue the life tenant for damages. The life estate titleholder is the one ultimately responsible for paying the taxes, insurance, assessments, and upkeep. 

Risks of life estate for a real estate investor
Granting someone a life estate on a property that an investor intends to eventually make a profit on can also be a risky proposition. Some of the common risks are:

• It is very much possible that the life tenant could outlive the life estate titleholder, or can even outlive the value and the usefulness of the property. An example is of a woman who died at a ripe old age of 122 years. She had sold her apartment to another person when she was 88 years old for $500 per month. He died in 1995 before her and had paid twice the market value of the property till then.
• The other big risk is the possibility that the expenses a titleholder pays on the property may far exceed the actual value of the property by the time of actual possession. To tide over this eventuality, the real estate entrepreneur should calculate judiciously before making a life estate offer. Figure out what will happen if the life tenant lives for 10 years, 20 years, or may be even beyond average age. Make your offer based on these calculations and even offer below-market than usual, to the extent of as little as 20-30% of the as-is value. 

Strategies for a viable life estate deal
Since life is so uncertain and human beings are born with "no expiry date," a real estate investor can consider adopting the following strategies to make viable deals: 

• Reverse mortgage. Many banks and real estate investors prefer this type of deal. Instead of paying the owner a lump sum for the property, they make monthly payments for the period he continues to live in the property. This meets the elderly seller's needs and lets him continue living in his home while receiving an income for it.
• Estate for years. This document grants the seller an ownership interest in the property through a certain date, which can be as long as it makes the seller comfortable, and gives the real estate investor the ability to plan on getting the actual ownership. The price of the property can be then calculated and paid for the life estate rights, based on the length of the period.

A life estate, if worked out strategically, can be mutually beneficial for both the homeowner and the real estate investor. It offers an opportunity for the elderly to live with dignity in their later years while generating potential profits for an investor.

 

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