Property - Releasing equity and renting at the same time query
In retirement, is buying a property, releasing the equity and banking it to get interest, and also renting out this same property, a viable way to making money in the here and now whilst retaining an asset (the property) that will grow in value over time? Are there any disadvantages you can think of?
There are numerous potential problems. The current interest rate environment would likely not generate a cash flow much higher than the interest at which you are borrowing at versus the property. In order to get a postive cash flow you would need to extend fairly far out on the yield curve or buy low quality fixed income. If you go too far on the yield curve in buying longer term bonds/CD's, you will be subject to an enormous amount of interest rate risk and potential principal decline when rate rise. If you buy shorter term, lower quality fixed income you risk principal default.
In terms of renting a property, there are also risks associated with becoming a landlord. You may depending on the area have difficulty renting the property and leave youself in the lurch servicing debt while not producing the cash flow from the lack of a renter.
Assuming you can obtain a renter, you need to be an experienced landlord. If te tenant fails to pay the rent, it can take 6-12 months to evict them. In some states if you try to turn off their services like electric and water for lack of payment, they can legally file a lawsuit against you, and will win.
Then you have the costs of fixing problems in the house that must be done timely as a landlord. And lastly you need to be careful who you rent to, since a bad tenant can destroy you home and leaves you with huge repair costs.
Thanks you for your detailed and thoughtful response LandmarkWealth. Yes, a bad tenant is always a possibility and unexpected maintenance costs can always occur. In my friend's case, he would not need to borrow to buy the house. Thanks again.
Maybe I missunderstood. I meant the releasing of equity from the property being exposed to interest rate risk.
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