Plan to start with first rental property soon with a business partner. Will have my primary residence paid off before we buy our first rental property and will also have the 20% down payment covered on first purchase. How is the best way to protect my current residence? My wife is more risk adverse than I am, and I'm pretty risk adverse myself and don't want to leverage my home (valued around 275k).
I'm not too concerned with the first property but plan to add to it over the coming years, just want to protect my current assets and handle the business side separate.
If you want to protect your home pullout all the equity and invest it elsewhere. Right now it is a huge target and costing you thousands per year in lost income. Pull it out and make it earn it's keep rather that hoarding it.
It is a lot of cash tied up but that doesn't fit our goals, to have everything paid off.
@Heath M. it doesn't appear your question got much coverage, so I thought I'd add my perspective. First off, my wife and I tend to share your risk-averse attitudes. But as we've progressed down our REI path, we've become more knowledgeable about, and thus comfortable with, managing risk. There are many forum discussions debating how to protect your personal assets. Most explore the pros and cons of using an LLC for your RE properties as a way to shield your main home against law suits stemming from your investments. LLCs get mixed reviews. Many people swear by them, but just as many if not more decry the challenge of making the LLC shield bullet-proof and question their efficacy and focus instead on having a good umbrella policy. We personally have a very good umbrella policy and have opted against LLCs for now. We would certainly consider them if we had partners, or if our business were much larger and more complex. For now, a good insurance policy is sufficient for our needs. Best of luck to you on your REI journey.
@Heath M. - @Chris Jensen has a lot of good points. Keeping properties in your personal name and buying an umbrella policy works well for many people. Also, having debt like a loan for 80% of the value of your primary home is valuable. The interest rate and appraisal environment are great. I would rather pull out 80% of 275k and put it in Microsoft stock or 4 more $200k houses at 25% down than let my house sit with so much equity that's not paying me. Obviously you need to make good decisions with the funds. You can take tax deductions on interest payments on schedule E reported 'prop loans' AND take the standard deduction if that's better for your taxes owed.
Your perceived risk of pulling your cash out of a property is handicapping your ability to be a successful investor. Cash is simply a tool that must be put to work or there is very little value in having it. Pull it out and put it to work. It doesn't make sense to not move it to where it is put to it's best use. It's a tool , use it.
If cash is not earning it's keep you are a hoarder of cash. Although some investors share your conservative approach with the desire to pay off every property they own they make very little return compared to leverage and would do far better putting their cash in a income fund.
Smart investors understand that as a tool leverage is the method best used to generate income. They pull excess cash out of a property even if it is only to place in alternate investment vehicles. Cash in any brick and mortar investment, paying down a mortgage, is where money goes to die.
My tax guy recommended a good umbrella policy instead of a LLC. I've been leaning towards the LLC route along with an umbrella policy so far. Going to meet with an estate attorney soon to make sure I have my ducks in a row.
Thanks all so far, I understand I'm leaving a lot of equity tied up but it's been a goal to be mortgage free by 40.
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