Reverse Mortgage Investment Property

Tapping into a Property with a Reverse Mortgage for Investment

Most of the time, when people talk about reverse mortgages, they have senior citizens in mind who have a considerable amount of equity in their homes but do not have a lot of liquidity, and they require access to that cash for their monthly income needs. Normally, here’s how the process works: seniors sign a reverse mortgage, and they receive monthly payments. They will never have to make payments for principal or interest, and the mortgage is not due until the homeowner dies, sells the house or moves out. A conventional mortgage shrinks over time, but a reverse mortgage grows. You take out a set amount in principal, or agree to receive a set amount each month, quarter or year, and the interest accrues as long as the homeowner stays alive and in the house.

Even though interest rates for reverse mortgages are generally higher than they are for conventional ones, the fact that interest rates remain at historic lows mean that this is actually a fairly cheap form of financing. So what else could you use that money for? Why keep all of your equity tied up in a house when you could get the money out, invest it in something more lucrative, and then use those proceeds to pay yourself back when the reverse mortgage comes due?

Here’s one example that sets you up for profits. Let’s say that you have a home worth $800,000 that is paid off. If you took out a reverse mortgage for $400,000 at 4 or 5 percent and then invested it in a diverse series of strategies that averaged an income of 9 percent? It’s not as good as having $400,000 free and clear to invest, but if you’re not looking to sell your house, you could be putting the equity to work for you in a more aggressive way. You could use that money to fund a private mortgage for a borrower, you could put it into the stocks or commodities market, or you could use a combination of approaches to diversify your risk. Let’s say you ran this operation for ten years. If you took out a simple interest reverse mortgage at 4 percent, you would owe a total of $560,000. But if you were able to bring in 9 percent annually, compounded once a year, you would make $946,945.47, for a profit that is just under $400,000 — in other words, you would make what you had taken out of the house as profit — after you paid yourself back. So if you’re looking to make some money out of your house, a reverse mortgage might just be the ticket to your ideal investment property.

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