Question on using equity in primary residence to invest
Hi! I'm new to real estate investing, and was going to use a cash-out refinance of my primary residence to fund a rental property purchase. However, doing this would mean that the rental property purchase would have no mortgage, and thus would be a bigger target for lawsuits. Yet, I have heard one shouldn't just sit on the equity in one's primary residence and should use it instead. I of course intend to get great insurance on the rental property, but even this might not be enough to protect from lawsuits. I would really appreciate hearing other people's thoughts on this.
Why does taking cash out of your home mean you cannot get a mortgage on a rent property? Those should not be mutually exclusive things.
If your bank is telling you you cannot have both, be sure you are talking to a mortgage broker that understands income property. The qualification rules are different than when you are just getting a mortgage on the house you live in.
Thank you so much for your reply Greg. I actually didn't ask, but I will. Thanks again!
@Mary E Zimmer I also don't see someone looking to sue you caring one way or another if you have debt on your property. I would maintain a good liability policy and if a good opportunity comes along pull money out of the investment to fund the next deal! Good luck.
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Property Manager
- Leake Real Estate
Thank you John!
You probably need to shop around. You don't need a mortgage broker to find you a residential lender that will consider your expected rent schedule when qualifying you for a loan. if you message me I can refer to you mine.
Many investors, on BP and probably elsewhere, hold rental properties in their name in various levels of leverage. Just keep the property in good repair, get the homeowners/landlord insurance, and get an umbrella policy (which really is pretty cheap for what it offers) and you should be fine.
Whether you use the equity in your home is up to you. Opinions are a dime a dozen. It depends on your investment strategy and goals as well as your tolerance level. There is nothing wrong with own a your home free and clear. At the end of the day, at least you know you will have a roof over your head. Sure, you could mobilize the equity in your home and try to make it perform for you. But, for example if retirement is near for you, I wouldn't want to --- just my personal strategy...
Good luck.
As others have said, shop around. Sounds like you are just starting out, but if you work with an investor-focused agent they may connections to a local broker who can provide info on investor-focused loans.
In terms of lawsuits, talk with your agent, lawyer, and CPA - what I've heard (and do) is carry an Umbrella policy on top of Personal Liability through Homeowner's Insurance when you're at the 'mom-and-pop' level. Best of luck.
@John Leake Unfortunately aggressive ambulance chasers know how to make money. The lowest hanging fruit the insurance coverage because the insurer is most likely to pay out. If a tenant is suing, it isn't hard for any attorney to get access to the public records to see if their are any mortgage liens on a house. If a house has minimal equity, it isn't worth their time to get a judge the order to take it, but if it is free and clear, that is a different story. @Mary E Zimmer is right that an unencumbered rent property is more of a target than one with a mortgage.
If you are concerned with the liability of investing and owning property outright -- have you ever looked at investing as a limited parter?
This would allow you to be in a more recession resistant asset class and not have any liability outside of your cash contribution.
Thank you so much to all of you for your helpful replies!
@Mary E Zimmer instead of using that equity to buy one house for all cash divide it up into four down payments and buy four properties with mortgages.
@Greg Scott That is a good insight. I was looking at it from a tenant perspective and how often that threat is thrown around. I also feel most lawyers would file a suit as long as the person they represent is willing to pay for it, though as you mentioned them looking at a larger payout would be an incentive. I have debt on everything because I believe its the best way to grow a portfolio and later 1031 into a larger asset without all of that money coming out of my pocket.
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Property Manager
- Leake Real Estate