When you pay cash for a $400,000 home and rent it out, your rate of return will likely be less than 6%.You could invest in stocks and earn 7% or better.You could put the money in a high-interest savings account and earn up to 5%.I don't understand why anyone would pay cash for real estate, erasing many benefits that increase the rate of return, while exposing themselves to the risk of loss (turnover costs, bad tenants, capex, etc.). 

Depreciation recapture applies at ordinary income rates capped at 25%, increasing your tax liability.

How will the partnership cash flow cover the HELOC payments if interest rates increase?

If a Room for Rent is worth $1000/month, then reverse amortization at current interest rates between 6.5-8.5% for 30 year mortgage would set the price between $130,000 to $158,000.

Throw in that you can dramatically increase the value of the property once you show consistent rent rolls much higher than when the space was used for LTR, and you have a big win. 

Start by leveraging what you already have—consider tapping into equity through a HELOC, house hacking again with an FHA loan, or increasing cash flow by converting a unit to a short-term rental.

You already mentioned Mid term, which can be a great way to increase cash flow.

I don't know how that business could survive long-term with such low rates.If those numbers are accurate and you can net $38,000 a year, then it's worth holding onto.

However, by placing money in a property that I would like to have in order to increase my quality of life, that can also produce some cash flow instead of being a liability that requires money every month, I can increase my quality of life without increasing my monthly liabilities.  

The homeowner collects a NET/NET 5% yield with 1% increases each year in long-term lease by a BBB+ credit rated tenant (similar to Morgan Stanley credit).