Have you ever thought of your home as an income-generating asset?
Real estate might not be the first thought that comes to your mind when you think of how to supplement your retirement income, but it’s definitely worth looking into.
Since properties’ values usually appreciate over time, real estate is a good way to boost your retirement savings. Real estate is also a great diversification tool. Aside from being less volatile, real estate investment is also not as difficult to understand as other investments because most retirees are already familiar with the idea of homeownership.
The advantages of investing in real estate for retirement are clear. But naturally, making your first real estate investment can still make you feel jittery, so we’ve compiled a list of real estate investing ideas, namely home equity, reverse mortgage, and direct ownership.
Simply put, home equity is the current market value of a house minus the amount of mortgage debt still owed. This amount can be viewed as savings or used as a financing tool for other expenses like home repairs or other debts. To tap into your home equity, you can get a home equity loan or a cash-out refinance.
Whether you obtain a cash-out refinance or equity loan, you will be required to have a certain income and you will need to make monthly payments. A cash-out refinance means refinancing your old mortgage and taking out a bigger loan. This method is recommended if you have at least 20% equity in your home and if the current interest rates are lower than your old mortgage’s. Meanwhile, a home equity loan or a “second mortgage”, allows you to borrow a lump sum against your home’s equity for a fixed rate over a period of time. You may also opt for a home equity line of credit (HELOC), which functions like a credit card with an adjustable interest rate.
If your mortgage is almost fully paid, an excellent way to cash in on your home equity is downsizing. Downsizing means putting up your house for sale and then buying a cheaper one so that you can keep the difference. Moving to a smaller home may also reduce your property tax and maintenance costs. Selling a house might be challenging, but there are plenty of real estate advertising ideas that can make the process easier for you. Simple things like sharing a story or using several high quality photos can do the trick.
If monthly payments or the required income bar you from tapping into your home equity, you can opt for a reverse mortgage. If you are 62 or older, you can borrow money against the value of your house. You may receive the money as a lump sum, through fixed payments, or through a line of credit.
Just like a regular mortgage, the house is considered the collateral for a reverse mortgage. However, a reverse mortgage does not require any monthly payments. Instead, the lender pays the borrower according to the homeowner’s choice. Additionally, the balance only becomes payable when the borrower sells the house, moves out, or passes away. Nonetheless, federal regulations ensure that the loan is structured in such a way that the loan does not exceed the house’s value. Consequently, if the homeowner moves out, selling the property will be enough to pay back the loan plus interest. These benefits make reverse mortgages quite attractive to retirees.
However, the payment from a reverse mortgage should not be seen as a replacement for income. Be wary of the monthly interest rate, and the other fees you will still need to pay such as property taxes and insurance. A reverse mortgage with a line of credit often works best for those who have paid off most or all their earlier mortgages, and want to keep living in their homes but want to prepare for unforeseen future costs.
If you wish to keep your house or other properties and use them for money-making, there are a range of options for you, too. On one hand, you can gain money from tenants in an apartment or commercial building, or short-term renters in a vacation house. On the other hand, if you do not have properties like that, you can simply rent out one of your spare bedrooms on Airbnb. With international travel restrictions slowly getting lifted, room rentals are going to be one demand again soon.
However, this type of investment comes with challenges like expensive maintenance and dealing with difficult renters. It is important to consider the taxes and regulations for rental properties as well as your capacity to handle various renters, especially those that fail to make payments. Screening tenants thoroughly and getting expert advice on real estate are two ways to manage these potential issues. Fortunately, you may also hire a property manager or use a rental platform that allows you to post a listing and receive fees.
Every investment has its pros and cons. Studying each option and getting expert advice is necessary before making your real estate investment decision. Nonetheless, if you weigh and manage the risks involved, you can effectively use your house to bolster your retirement fund.
More questions about reverse mortgages or mortgages, contact us at Info@ReverseMortgageLoanAdvisors.com