Boomers: Here Are 5 Ways To Leverage Equity for Smart Investments in Retirement
Baby boomers are among the luckiest of generations when it comes to having purchased homes at a time when prices were low and yet reaping the fruit of high appreciation over the decades. This equity is a source boomers can tap in retirement for everything from additional income to investing purposes.
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Additionally, downsizing can also help boomers net more income in the leaner income years, whether that means selling your house and repurposing the money from the sale, or moving into a smaller home and renting out your bigger one for passive income.
Experts explain how boomers can make the most of their equity in retirement.
Decide How and Why To Access Your Equity
The average homeowner has about 50% equity in their house right now in most markets across the country, according to Michael Gifford, the CEO and co-founder of Splitero, and a career real estate home equity expert. “The major question, whether you’re a boomer or not, is how to access that,” he said.
But an equally important question is why are you accessing it? To move, to invest it, to leave it as a legacy?
“Are you really downsizing or going to some rental?” Gifford asked. “The hard part is rents are also pretty expensive in a lot of markets. It’s not like a lot of times you can rent for drastically cheaper than you can own for still. So that is always a pretty personal choice for that homeowner.”
You also must keep tax implications of a sale in mind, he urged. Ultimately, this decision should be made strategically.
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Home Equity Investment
The traditional ways to access your home equity include a home equity line of credit and a cash-out refinance, Gifford said. Both of those options require a decent income level, a strong debt-to-income ratio and typically a higher credit score.
Another option, which his company offers, is a vehicle called a home equity investment. “So it’s not a debt product, it doesn’t matter what your income level is,” he said. It also allows for people with lower credit scores (think 500s instead of 700s) to access their equity. There’s no monthly payment on it, so they can access the equity as they please, he explained. Most people use it to pay off debt because things have gotten expensive.
A lot of boomers want to repair or renovate their house, perhaps for aging in place, he added. “So this is a perfect product to do that. Then you’re not changing your monthly cash flow as you age.”
House Hack or Pad Split
Another option for boomers is to engage in house hacking, which is when you buy a duplex, triplex or quad to live in one unit and lease out the remaining units, according to Ryan Dossey, owner and real estate investor at SoldFast.
Boomers are likely to have more time on their hands to spend the time involved in researching and managing such properties, as well.
You could either tap your own equity to pay for one, or, Dossey said, “It’s possible to get low down payment loans via FHA, VA or conventional because anything smaller than five units is classified as residential.”
He shared that there’s also a new company called PadSplit that effectively turns a normal single-family residence into a boarding house. This could be a solution to cities that are cracking down on short-term rentals like Airbnb.
Shared Appreciation Mortgage
Boomers often overlook the strategic use of home equity conversion strategies, such as using a shared appreciation mortgage (SAM), according to Scott Waters, a real estate agent with REAL.
A SAM allows you to borrow against your home equity with the understanding that the lender will take a percentage of the home’s appreciation when it is sold.
“This can be an innovative way to access funds while minimizing immediate repayment burdens,” he said.
Real Estate Syndications
Another effective strategy is to consider local real estate syndications, Waters said.
By pooling resources with other retirees, you can invest in more significant properties or commercial real estate, diversifying your portfolio without the headache of direct management.
Pocket Cash From a Downsize
If you bought your home a long time ago and it has appreciated in value significantly, simply selling can leave you with significant cash, according to Andrew Fortune, a realtor and owner of the real estate brokerage Great Colorado Homes.
“We often have boomers reach out to our real estate brokerage to downsize from the large homes they live in to something more manageable. Many times, they can pocket $1 million or more in cash when they do this, based on where they live and where they are moving to,” Fortune shared.
Some boomers put equity from their home into a multifamily unit to create cash flow, as well, he said.
“Boomers like this option because they can pass the unit on to their families after they die. It’s an easily managed asset to guarantee cash flow every month and it helps with capital gains taxes, if applicable.”
There are plenty of options to take advantage of home equity in retirement, but be sure to consult with a finance professional or mortgage broker before doing so to ensure you don’t jeopardize any aspect of your retirement.
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This article originally appeared on GOBankingRates.com: Boomers: Here Are 5 Ways To Leverage Equity for Smart Investments in Retirement