Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes
I often hear that it's important to keep your properties heavily mortgaged to keep the equity down, so that you don't look "juicy" for a lawsuit. (assuming there's a reason for being sued in the first place) I cannot imagine that being true. It strikes me as a very fear-based way of strategizing. Can anyone comment on that?
Rental Property Investor · Richmond, VA · Member since 2018 · 46 posts · 90 votes
7y
Attorneys who represent inured people look for Insurance not equity in real property. Even if an attorney got a judgment in that situation, they would have to turn that judgment into a judicial sale of the property in order to collect, which would be a nightmare. Also, if there's a mortgage at all, an attorney wouldn't be privy at the outset on whether the property owner were leveraged 90% or 10% LTV.
The only time I see this remotely being an point of concern is if there were horrific injuries and the owner had grossly inadequate Insurance (which should never be the case).
I often hear that it's important to keep your properties heavily mortgaged to keep the equity down, so that you don't look "juicy" for a lawsuit. (assuming there's a reason for being sued in the first place) I cannot imagine that being true. It strikes me as a very fear-based way of strategizing. Can anyone comment on that?
I’ve heard the same thing but I don’t think it’s a reasonable strategy nor is it one specifically employed by REIs across the board as it relates to asset protection. As a talking point it may make sense, but it doesn’t stand up once the premise is unpacked for various reasons; one being the leverage component. And, it certainly wouldn’t be embraced by REIs working toward paying off their loans. Personally, I focus on having good insurance and using LLCs.
Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes
7y
Well that's what I thought as well, but we've sold off a couple of buildings over the last couple of years and retired some of our other mortgages way ahead of schedule, so I like to make sure all the t's are crossed so to speak. Thanks for weighing in.
Rental Property Investor · Phoenix AZ / Kendallville, IN · Member since 2016 · 293 posts · 149 votes
7y
I don't think thats true. I haven't had any mortgages for the last two years and it doesn't seem to be an issue. I have my LLC in a Living Trust, insured and its very well protected, but it doesn't mean someone wont come after me.
Rental Property Investor · Phoenix AZ / Kendallville, IN · Member since 2016 · 293 posts · 149 votes
7y
I don't think thats true. I haven't had any mortgages for the last two years and it doesn't seem to be an issue. I have my LLC in a Living Trust and insured and its very well protected, but it doesn't mean someone wont come after me.
Suppose a tenant goes to a lawyer and says he fell at or some other problem happened at his rental. The attorney does a quick search on the owner and the property. What does the attorney find-a fully leveraged property or a free and clear property? Does the attorney say I will take the case provided you give me $5k retainer which most likely won’t materialize if it’s leveraged OR I will take the case and take 1/2 of what I recover- if it’s free and clear? How much asset protection do you need?
The other reason to have a mortgage is you don’t leave all that equity tied up in the building. You can borrow the money at a low rate and invest it at a higher rate thus having $$$ working for you.
Rental Property Investor · Richmond, VA · Member since 2018 · 46 posts · 90 votes
7y
Attorneys who represent inured people look for Insurance not equity in real property. Even if an attorney got a judgment in that situation, they would have to turn that judgment into a judicial sale of the property in order to collect, which would be a nightmare. Also, if there's a mortgage at all, an attorney wouldn't be privy at the outset on whether the property owner were leveraged 90% or 10% LTV.
The only time I see this remotely being an point of concern is if there were horrific injuries and the owner had grossly inadequate Insurance (which should never be the case).
Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes
7y
Thank you @Damon Pendleton - It didn't make sense to me at all to even factor in risk of lawsuit in deciding whether or not to be leveraged, and you put the icing on the cake. I mean really ... if I sell a building and have 250K extra cash leftover, I have 250K ... whether I pay off an existing mortgage and end up with a free and clear building OR put it in the bank. I wouldn't think either one would be any easier to discover than another, honestly.
Attorney · Wilsonville, OR · Member since 2017 · 504 posts · 411 votes
7y
@Costin I. thanks. @Kenneth LaVoie You are talking about equity stripping or Real Estate Equity Investment Structure. It is more advanced method of asset protection for those with high-risk profession such as medical doctors with certain surgical specialties or OBGYNs who specialize in high risk births, business owners whose business own assets, and real estate investors with high visibility and risk with high number of units generally with a high risk profession. Their is no reason for your average Joe or above average Joe to consider this strategy until you fall into the above criteria and have a reason for it.
Essentially what you do is borrow fund at favorable rates, and the security for the lender is provided by a mortgage or lien over the available equity in the real estate asset, and the loan proceeds are directly transferred into an Offshore trust. This strategy is best used when combining it with LLCs and Trusts and placing them offshore.
This strategy is not for everyone. What you are really getting at when this option is discussed with clients is not ‘asset protection’ but what they really want and are talking about is ‘life style protection’. That means freeing up liquid cash and protecting it in an offshore trust so they can continue using and spending their money and paying bills, making purchases and vacations etc. Sure you can set up any domestic system, but then any court can freeze your accounts and assets. Yes the attorney still did their job and 'protected' the assets, they are still protected, but they are now frozen. Now what? Besides a upset client and assets they can't use / liquidity. For clients who can put away a few million overseas for a rainy day, this is a life style protection method.
Talk to an asset protection lawyer and CPA about this and your personal situation and do not do this yourself or you will fail. Essentially you establish an Offshore trust; then an offshore finance company makes a loan to you in an amount equal to 95% of the real estate equity you wish to protect; the loan proceeds are transferred by the lender directly into your offshore trust and invested in a certificate of deposit (CD) issued by the offshore bank; for collateral you give a mortgage on the properties protected.
I am not going to go into any detail on this as you need to talk to a asset protection attorney familiar with foreign trusts and equity loan structures. By placing the mortgage on your properties you are now removing the equity, ad placing that equity in an offshore trust where no US creditor or court can reach it.
There are lots of nuts and bolts to this method. I am not going to go into them on this topic since it involves a lot. Also, like any asset protection system, it needs to be implemented before you are under attack or expected to be under attack. Being proactive. When done as part of a thought-out and well-crafted plan, equity stripping can be a very powerful asset-protection tool. It is often best used with other protection strategies, such as a LLC structure, which protects property and owner alike. These strategies must consider the strategic use of loan proceeds and be executed well in advance of there being a need for them, so as to avoid being seen as fraudulent transfers by the courts.
Rental Property Investor · Round Rock, TX · Member since 2016 · 1k+ posts · 971 votes
7y
@Brian Bradley you are explaining how to do equity stripping, but @Kenneth LaVoie question (I think) and my interest too is more along the lines of...is large equity making you a juicer target for lawsuits and is the mortgage a deterrent?
Attorney · Wilsonville, OR · Member since 2017 · 504 posts · 411 votes
7y
@Costin I. The equity in a property is a big part of the formula evaluation when comparing cases. When I file a lawsuit and calculate potential damages, how and where the money to collect on a judgment will come from is all we care about. If I have an amazing case with law and facts and large damages, maybe a wrongful death or negligence etc, but no assets or method to actually realize an award, and the insurance is limited or will be another expensive fight, that case gets passed up on for a easier case to collect on.
What insurance do you have, what’s it’s coverage, what other assets do you have that I can connect a judgment to and force you to sell to collect then goes into the formula.
If let’s say your house has no equity in it, then you are worthless to collect against and I need to find other assets and methods to actually exercise and collect a judgment. Getting a judgment on a good case tends to be the easy part. Actually knowing how you will collect and the amount etc you will actually collect is another. So yes, your equity from a legal perspective of evaluating damages is a part of the formula.
Attorney · Wilsonville, OR · Member since 2017 · 504 posts · 411 votes
7y
@Costin I. General rule of thumb is don’t sue if you cant prove your case, and don’t sue if you cannot collect or the cost to collect exceeds the award. That’s the business end of litigation firms. I have let go tons of great cases just for the lack of ability to collect. Chop shop firms generally won’t do an asset evaluation for damages, in hopes of just a small settlement at the mandatory settlement conference post surviving a summary judgment hearing. What’s your better and more accredited firms are seasoned litigation lawyers will evaluate damages and assets to collect on before they even take a case and that includes equity . Otherwise you’re wasting a lot of time for nothing to just say you got a W.
Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes
7y
Thanks all, and yes, I was only asking a simpler question, BUT I enjoyed reading about "equity stripping". I'd never heard of this exact ploy and I like the sounds of it! Very interesting. Not that I'm quite in the position to go to those lengths, but it's nice to learn about new things. Thanks all, and especially to the attorneys for weighing in.
Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
7y
@Kenneth LaVoie leveraging assets is a very common asset protection strategy. A lawyer can very easily do an asset search to see what you are worth. If it shows that you are highly leveraged, an injury lawyer will more likely NOT pursue the lawsuit. If they find that you have a lot of liquid assets, you are definitely a more favorable target.
Attorneys who represent inured people look for Insurance not equity in real property. Even if an attorney got a judgment in that situation, they would have to turn that judgment into a judicial sale of the property in order to collect, which would be a nightmare. Also, if there's a mortgage at all, an attorney wouldn't be privy at the outset on whether the property owner were leveraged 90% or 10% LTV.
The only time I see this remotely being an point of concern is if there were horrific injuries and the owner had grossly inadequate Insurance (which should never be the case).
Not accurate, at least around here. Judgments against property owners become liens ... with a 6-10% annual rate post-judgment. No need to levy, just wait to be paid off in sale or refi.
Rental Property Investor · Richmond, VA · Member since 2018 · 46 posts · 90 votes
7y
Tom are you saying you’ve seen property owners with adequate insurance get a judgment against them for a personal injury case and then that judgment is placed it against the property, or as an operation of law, it serves as lien against the property?
In every instance I’ve seen as part of any settlement with the Insurance company the plaintiff will have to sign a release of all claims which would prevent the attorney from doing as you suggest. Can they, maybe if the owner doesn’t have adequate insurance, but the likelihood is extremely rare if adequately insured.
By law judgments become liens against all real property owned by the judgment debtor in the jurisdiction where entered/recorded. Of course there are exceptions to attachment but that's the general rule.
Investor · FL · Member since 2017 · 266 posts · 220 votes
7y
@Kenneth LaVoie
I’ve heard of just putting some sort of first position lien yourself on a property/porfilio via different corporation you personally own. 0% interest for 100 years. If anyone wants to give me hard money at that rate I’ll work with you :)
