Many boomers and other seniors want to invest beyond traditional resources and are starting to consider the prospects of owning rental property. There are a couple different ways a reverse mortgage could be used to purchase rental property. The first would be refinancing their current home and paying cash for a rental. The second would be selling their current home and purchasing a multi-unit property as their principal residence.
Why Seniors A Buying Rental Property
If people felt they could get a reasonable return on money in the traditional way, then these nontraditional ways would have no appeal. But savers are getting killed and looking for ways to increase cash flow. There aren’t many ways to do that right now.
Baby Boomers are taking advantage of low interest rates, an abundance of homes for sale and a large group of renters (many of whom are millennials) and getting into real estate investing.
Refinancing your current home to leverage the equity to purchase an income producing property is what is often referred to as arbitrage. You are utilizing debt to secure an asset. There are some serious risks with this method, and is not suggested for most people.
For this to work in the most efficient and profitable manner, you would reverse mortgage your current property and use the equity to pay cash for a rental property. Because there are no payments with a reverse mortgage, and assuming you paid cash for the rental, this option could create another source of cash flow.
Risks with Buying Rental Property
However, there are a significant amount of risks associated with the plan. First and foremost, you need to understand that you are now taking on another set of costs. These include taxes, insurance, maintenance, management costs, legal costs and potentially significant costs should the tenants cause significant damage to the property. If you are not properly prepared with other financial resources, what you thought of as a cash cow could quickly turn into a financial albatross around your neck.
If you have never owned rental property you should do some serious research and soul searching. This includes talking with other rental property owners, property management companies, real estate agents, attorneys, financial planners, insurance agents and CPA’s. You need to make sure you are financially prepared to own a rental and have the legal and financial protections in place.
Use a Property Management Company
If you decide that you do want to move forward with this plan, I would highly suggest working with a good property management company. This takes the stress of managing the property off your plate. Your emotions won’t come into play when a tenant gives you a sob story. They will probably do a much better job vetting a potential renter than you will. They will charge you a percentage of the rent to manage your properties which, from my own personal experience, is well worth it.
Purchase a Multi Unit Property with a Reverse Mortgage
Another option worth considering is selling your current home and purchasing a multi-unit property. This could be a duplex, triplex or four plex. It could also be a property with 2 to 4 single family homes on it. You cannot exceed four units.
Using a reverse mortgage to purchase a multi-unit property is the same process as purchasing another home.
There are three scenarios where someone would consider this. The first is if they are looking for additional cash flow. The second is if they are trying to set up a situation where they could have an older family member live nearer to them. Third would be if younger family members have run into hard times and they are trying to help them.
There are still risks associated with this option. Expenses including taxes, insurance, maintenance and utilities will more than likely increase. Secondly, depending on how much you netted from the sale and then subsequent purchase of a multi-unit property, you may not have enough in reserves to deal with the added and unforeseen expenses of owning a rental property.
Just as with using the reverse mortgage proceeds to purchase a rental, you need to be fully prepared before deciding. Getting the input and advice from various advisors is critical. It is also important not to create a new lifestyle of living based off of the new-found cash flow.