Reverse mortgages allow homeowners aged 62 and older to access their home equity without having to sell the property or make monthly payments. While commonly used for primary residences, reverse mortgages can also be taken out on investment properties. This article will examine the potential benefits and risks of using a reverse mortgage on an investment property.
Additional cash flow from rent can help fund retirement
A major potential benefit of a reverse mortgage on an investment property is that it can provide extra income in retirement. The rental income from tenants can be used to supplement Social Security payments, pensions, and personal savings. This added cash flow allows retirees to maintain their standard of living. However, rents received would need to exceed loan costs for the strategy to make financial sense.
Allows tapping home equity without selling the property
Selling an investment property with substantial appreciation would trigger capital gains taxes. A reverse mortgage allows accessing those gains tax-free. Seniors can receive funds through a lump sum, line of credit, regular payments, or a combination. This provides financial flexibility without the need to immediately sell the asset.
Risk of losing equity in the property
With a reverse mortgage, the loan balance grows over time as interest is added. If heirs want to keep the property, they would need to repay the loan at a potentially inflated amount. If the loan can’t be repaid, the lender takes ownership and sells the property to recover funds. So reverse mortgages pose the risk of heirs losing a significant portion of home equity.
In summary, reverse mortgages on investment properties can provide retirees with added income and access home equity gains. But they also involve risks like losing a substantial portion of equity to the lender. Careful analysis of costs and benefits is needed.