If you have equity in your rental property but you’re not ready to sell yet or you’d prefer to pass the property on to your heirs, but you still need a quick influx of cash, you can always borrow against the property’s equity. This can be a risky move though, so make sure you know what you’re getting into before you do it.
A major advantage of an equity loan is that it’s not considered income so you won’t be taxed on it. But you do need to pay it back, with interest, so proceed with caution.
You’ll also want to make sure you know what will happen to the debt when you die, especially if your goal is to pass the property on to your heirs. A required loan payout on death (like in a reverse mortgage situation) may force your family members to sell the property which is not what you want.
If you are considering borrowing against your rental property, do so with extreme caution. It’s critical to fully understand the terms of the contract, required repayments, interest rate, and what happens to the loan when the property transfers to your heirs. Work with a reputable lending professional you know and trust, or get a referral and triple check their references.
What About Reverse Mortgages?
A reverse mortgage works differently than an equity loan. Generally with a reverse mortgage, you borrow against the equity of the property, like a home equity loan, but unlike a home equity loan, the balance of the reverse mortgage goes up over time instead of down which is why a payout is required when you die.
You can’t get a reverse mortgage on a rental property, but you could get a reverse mortgage on your own home and use that to purchase a rental property if you’re late to the retirement game and wish you would have purchased a rental property when you were younger.
Still, you could probably accomplish the same thing with a home equity loan at a lower interest rate. Be sure and research your options carefully.
It’s important to make sure a rental property is the right investment for you. Before investing, make sure you understand how to calculate your net cash flow
from the rental to make sure you don’t get into a bad investment.
Of course, as a CPA, I have to mention tax consequences. They are always there lurking in the background. Rental properties come with some excellent tax deductions
, but when it’s time to sell be prepared to pay the tax man.
Before you get carried away with your real estate investing, be sure to read these important lessons
and always check with a certified tax professional who knows the ins and outs of real estate investing to make sure you’re getting the most up-to-date tax advice possible. Tax laws change all the time and you don’t want to be caught off-guard!
is a recovering CPA with a passion for writing. Her book Keep More Money: Find an Accountant You Trust to Help You Grow Your Small Business, Increase Profit, and Save Tax
was written as a result of meeting many people online who needed an accountant but didn’t know how to go about finding one (or why they should). Michelle’s current project is a thriller titled “Murder Audit”. When Michelle’s not writing, she’s hanging out with her two boys and husband in the beautiful Okanagan Valley.
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