Hey anybody every hear of equity stripping?
Property Manager · Myrtle Beach, SC · Member since 2014 · 135 posts · 13 votes
So i get this email and link http://alaiello.com/equity-stripping-jg.htm
Anybody ever hear of this?
tks
I've heard of it, unless I'm mistaken it is nothing more than refinancing and maxing out a HELOC on properties as often as you possibly can. The trouble is getting a bank to loan you money on that equity. Generally with rental properties they aren't too keen on going above 75-80% LTV and it's pretty difficult to get one to go as high as 90% let alone 100%.
Yup. A lot of people on BP confuse it with foreclosure rescue schemes for some reason. Equity stripping has to do with the financial side, mainly predatorial lending, or schemes to make properties look like they have no equity in them for bankruptcy and the lawsuit collection purposes.
@Nicholas W. The link seems to be more about using entities and probably some sort of complicated loan structure to try to make assets look judgment proof. It sounds rather fraudulent to me, but I'm not going to pay the $499 to learn what this AMAZEBALLS concept is.
A good question for these type of schemes and seminars is to ask if there are any published appellate decisions in your state in which this type of scheme has been found to be valid. If not, you really have no way of knowing if it would hold up.
@Nicholas W. The link seems to be more about using entities and probably some sort of complicated loan structure to try to make assets look judgment proof. It sounds rather fraudulent to me, but I'm not going to pay the $499 to learn what this AMAZEBALLS concept is.
A good question for these type of schemes and seminars is to ask if there are any published appellate decisions in your state in which this type of scheme has been found to be valid. If not, you really have no way of knowing if it would hold up.
On the judgement side of things, at one time before the Dodd Frank rules, people would go open a HELOC on said property that would wipe out all the equity, they would not draw on it, but it would still be shown as a debt owed to the bank. They would do this before or around the time the case started or at a point that a judgement was likely. Can't get blood out of a rock right. Nothing stopping you from maxing out the credit line now, but if you do it with intent to stop a foreclosure or some other judgement...
Very well said :-)
Equity stripping is one of things that sound great but should actually think through before stepping into it. If it's just for lawsuit reasons then a good insurance policy with umbrella coverage makes much more sense.
A lot of time investors will do things that make no sense rather than properly insuring the property. Equity stripping has a very bad wrap because some investors have put to very bad use. Refinancing equity has it's place and can be done if the funds are used correctly.
interesting....
actually laughed out loud Cody....
Let say you own a $100k house that has $60k loan. You have $40k of equity that's at risk of a lawsuit.
Now go to a bank and get loan on that equity. You won't be able to borrow $40k but you should be able to get $20k
Don't draw the funds (unless you want to pay interest).
Boom. You just cut your equity liability exposure in half.
Please send me $499 for the info
Does anyone know if banks and if so what banks will give you an equity line of credit on a rental?
Equity Stripping can also refer to an originator's responsibility, when finding net tangible benefit for a borrower. If you're chopping deeply into their equity with origination fees, and buy downs, it might interfere with our fiscal responsibility to the borrower. For example a borrower has 15% equity in their home, they just refinanced 6 months ago at 4.25% and someone tries to refinance them again at 4.125% but origination + fees are 6k which takes their equity to 11%. (it won't pass the fee's test but I'm just giving an example off the top of my head). That would also be considered equity stripping. "Equity stripping and loan flipping" was a pre 2008 mantra.
Let say you own a $100k house that has $60k loan. You have $40k of equity that's at risk of a lawsuit.
Now go to a bank and get loan on that equity. You won't be able to borrow $40k but you should be able to get $20k
Don't draw the funds (unless you want to pay interest).
Boom. You just cut your equity liability exposure in half.
Please send me $499 for the info
Does anyone know if banks and if so what banks will give you an equity line of credit on a rental?
I hate to be the one to reply "no, I don't" as if I don't know, I just won't answer. But since I'm quoted, then I'll chime in.
No, I don't know of any banks that do this :) I'd suspect most local banks will do it for the traditional W2 income 9-5'ers out there. Since I have no hope of those loans, I don't really consider them. When I have a lot of equity, and I need it, I just refinance (which I can do on a commercial property even if there is no chance in hell of doing it on a 1-4 family)
Sorry that's not a lot of help.
Let say you own a $100k house that has $60k loan. You have $40k of equity that's at risk of a lawsuit.
Now go to a bank and get loan on that equity. You won't be able to borrow $40k but you should be able to get $20k
Don't draw the funds (unless you want to pay interest).
Boom. You just cut your equity liability exposure in half.
Please send me $499 for the info
Does anyone know if banks and if so what banks will give you an equity line of credit on a rental?
I hate to be the one to reply "no, I don't" as if I don't know, I just won't answer. But since I'm quoted, then I'll chime in.
No, I don't know of any banks that do this :) I'd suspect most local banks will do it for the traditional W2 income 9-5'ers out there. Since I have no hope of those loans, I don't really consider them. When I have a lot of equity, and I need it, I just refinance (which I can do on a commercial property even if there is no chance in hell of doing it on a 1-4 family)
Sorry that's not a lot of help.
So Cody, are you living off your multi family investments? You can still get loans without W2 income for those?
Let say you own a $100k house that has $60k loan. You have $40k of equity that's at risk of a lawsuit.
Now go to a bank and get loan on that equity. You won't be able to borrow $40k but you should be able to get $20k
Don't draw the funds (unless you want to pay interest).
Boom. You just cut your equity liability exposure in half.
Please send me $499 for the info
Does anyone know if banks and if so what banks will give you an equity line of credit on a rental?
I hate to be the one to reply "no, I don't" as if I don't know, I just won't answer. But since I'm quoted, then I'll chime in.
No, I don't know of any banks that do this :) I'd suspect most local banks will do it for the traditional W2 income 9-5'ers out there. Since I have no hope of those loans, I don't really consider them. When I have a lot of equity, and I need it, I just refinance (which I can do on a commercial property even if there is no chance in hell of doing it on a 1-4 family)
Sorry that's not a lot of help.
So Cody, are you living off your multi family investments? You can still get loans without W2 income for those?
I'm for sure living off my properties. They make more than I'd ever need to spend. I have no w2 income as I don't have a 'job'. And the properties are not profitable on paper.
Let me give you a quick example of how that can be: Let's say you buy a $1m property, and spend $200k fixing it up. On paper you've lost $200k (well, not really as some will be capex, thus written off over time, and maybe the property made some income to offset the $200k of improvements, but there will also be depreciation that lowers income, so for now just roll with it for the example).
Now I get it appraised for $2m because I've fixed some issues, and it's clean and nice, better NOI, etc.
Because I think logically, I think "Cool, I bought it for $1m, put in $200k, it's worth $2m, I just made $800k!". But really you didn't "make" anything (to the IRS). You simply increased your net worth by $800k but really you took a paper income loss of that $200k
So how do you feed yourself? Well you can refinance. A new bank lends you $1.6m on your $2m building. That $200k of improvements is paid back as is your $1m purchase price. You now have $400k in the bank that you didn't have before. But it's not income -- it's a loan.
So do a lot of that, over and over.
You end up with tons of equity, tons of cash in the bank, tons of "future" (IRS taxable) income (when you stop buying more and doing this). Yet on your tax returns you look like a worse-than-homeless guy with huge losses.
Traditional banks that just do conforming loans can't ever lend to you since they are forced by the government to only consider IRS taxable income for the purposes of seeing what you make (the government does this to encourage people to take less write offs, but they say the rules are to "protect" people against "predatory lending" (no such thing -- only predatory borrowers IMO). Where as in commercial land, when you talk to an actual lender who has a brain, they can see that you're doing just fine. So I can get a 80% loan on a $4m property no problem. But refi one of my original $100k homes? Impossible. And that's fine with me.
Let say you own a $100k house that has $60k loan. You have $40k of equity that's at risk of a lawsuit.
Now go to a bank and get loan on that equity. You won't be able to borrow $40k but you should be able to get $20k
Don't draw the funds (unless you want to pay interest).
Boom. You just cut your equity liability exposure in half.
Please send me $499 for the info
Does anyone know if banks and if so what banks will give you an equity line of credit on a rental?
I hate to be the one to reply "no, I don't" as if I don't know, I just won't answer. But since I'm quoted, then I'll chime in.
No, I don't know of any banks that do this :) I'd suspect most local banks will do it for the traditional W2 income 9-5'ers out there. Since I have no hope of those loans, I don't really consider them. When I have a lot of equity, and I need it, I just refinance (which I can do on a commercial property even if there is no chance in hell of doing it on a 1-4 family)
Sorry that's not a lot of help.
So Cody, are you living off your multi family investments? You can still get loans without W2 income for those?
I'm for sure living off my properties. They make more than I'd ever need to spend. I have no w2 income as I don't have a 'job'. And the properties are not profitable on paper.
Let me give you a quick example of how that can be: Let's say you buy a $1m property, and spend $200k fixing it up. On paper you've lost $200k (well, not really as some will be capex, thus written off over time, and maybe the property made some income to offset the $200k of improvements, but there will also be depreciation that lowers income, so for now just roll with it for the example).
Now I get it appraised for $2m because I've fixed some issues, and it's clean and nice, better NOI, etc.
Because I think logically, I think "Cool, I bought it for $1m, put in $200k, it's worth $2m, I just made $800k!". But really you didn't "make" anything (to the IRS). You simply increased your net worth by $800k but really you took a paper income loss of that $200k
So how do you feed yourself? Well you can refinance. A new bank lends you $1.6m on your $2m building. That $200k of improvements is paid back as is your $1m purchase price. You now have $400k in the bank that you didn't have before. But it's not income -- it's a loan.
So do a lot of that, over and over.
You end up with tons of equity, tons of cash in the bank, tons of "future" (IRS taxable) income (when you stop buying more and doing this). Yet on your tax returns you look like a worse-than-homeless guy with huge losses.
Traditional banks that just do conforming loans can't ever lend to you since they are forced by the government to only consider IRS taxable income for the purposes of seeing what you make (the government does this to encourage people to take less write offs, but they say the rules are to "protect" people against "predatory lending" (no such thing -- only predatory borrowers IMO). Where as in commercial land, when you talk to an actual lender who has a brain, they can see that you're doing just fine. So I can get a 80% loan on a $4m property no problem. But refi one of my original $100k homes? Impossible. And that's fine with me.
I follow you. I have heard of this before minus not having W2 income. I can live off my handful of single family home rentals and they also show up as a loss on paper. I've been looking at 20-50 unit apartment complexes around the country and learning about them for a few months so I can scale.
Right now I'm just enjoying the 250K+ of tax free addition to my net worth each year, not counting what I save from my job.
I'm really hoping to buy an apartment complex and re-position it to increase its value from 2 to 3 million, etc.
Man, imagine doing that with four or five complexes in a couple years. Talk about not having to worry about money anymore at that point...
Let say you own a $100k house that has $60k loan. You have $40k of equity that's at risk of a lawsuit.
Now go to a bank and get loan on that equity. You won't be able to borrow $40k but you should be able to get $20k
Don't draw the funds (unless you want to pay interest).
Boom. You just cut your equity liability exposure in half.
Please send me $499 for the info
Does anyone know if banks and if so what banks will give you an equity line of credit on a rental?
I hate to be the one to reply "no, I don't" as if I don't know, I just won't answer. But since I'm quoted, then I'll chime in.
No, I don't know of any banks that do this :) I'd suspect most local banks will do it for the traditional W2 income 9-5'ers out there. Since I have no hope of those loans, I don't really consider them. When I have a lot of equity, and I need it, I just refinance (which I can do on a commercial property even if there is no chance in hell of doing it on a 1-4 family)
Sorry that's not a lot of help.
So Cody, are you living off your multi family investments? You can still get loans without W2 income for those?
I'm for sure living off my properties. They make more than I'd ever need to spend. I have no w2 income as I don't have a 'job'. And the properties are not profitable on paper.
Let me give you a quick example of how that can be: Let's say you buy a $1m property, and spend $200k fixing it up. On paper you've lost $200k (well, not really as some will be capex, thus written off over time, and maybe the property made some income to offset the $200k of improvements, but there will also be depreciation that lowers income, so for now just roll with it for the example).
Now I get it appraised for $2m because I've fixed some issues, and it's clean and nice, better NOI, etc.
Because I think logically, I think "Cool, I bought it for $1m, put in $200k, it's worth $2m, I just made $800k!". But really you didn't "make" anything (to the IRS). You simply increased your net worth by $800k but really you took a paper income loss of that $200k
So how do you feed yourself? Well you can refinance. A new bank lends you $1.6m on your $2m building. That $200k of improvements is paid back as is your $1m purchase price. You now have $400k in the bank that you didn't have before. But it's not income -- it's a loan.
So do a lot of that, over and over.
You end up with tons of equity, tons of cash in the bank, tons of "future" (IRS taxable) income (when you stop buying more and doing this). Yet on your tax returns you look like a worse-than-homeless guy with huge losses.
Traditional banks that just do conforming loans can't ever lend to you since they are forced by the government to only consider IRS taxable income for the purposes of seeing what you make (the government does this to encourage people to take less write offs, but they say the rules are to "protect" people against "predatory lending" (no such thing -- only predatory borrowers IMO). Where as in commercial land, when you talk to an actual lender who has a brain, they can see that you're doing just fine. So I can get a 80% loan on a $4m property no problem. But refi one of my original $100k homes? Impossible. And that's fine with me.
I follow you. I have heard of this before minus not having W2 income. I can live off my handful of single family home rentals and they also show up as a loss on paper. I've been looking at 20-50 unit apartment complexes around the country and learning about them for a few months so I can scale.
Right now I'm just enjoying the 250K+ of tax free addition to my net worth each year, not counting what I save from my job.
I'm really hoping to buy an apartment complex and re-position it to increase its value from 2 to 3 million, etc.
Man, imagine doing that with four or five complexes in a couple years. Talk about not having to worry about money anymore at that point...
Yeah, I haven't had a real job in forever. It's nice knowing I don't really *have* to work anymore (meaning I can just stop and live off my investments) I really like doing it so I keep refinancing, buying, selling, etc. It becomes an addiction. I used to say "When I have x doors I'll stop" but you never stick by it.
My new goal, which I think will be what causes me to be truly done, is when I have a $1m/month rent roll.
@Cody L., so what's that... about 1000 units?
hehe, not the stuff I'm buying. While I have some "units" that rent for $15-20k (commercial), and some 'hip area' $1000/month studios, the bulk of my holdings is blue collar hard working Hispanic submarkets with a lot of $600/month type stuff.
I'll need another 500 units likely. At some point I'll sit and spend some time seeing what type of equity I have, what I can realistically pull out, what I could buy with that, etc. But that growth will require in increase in asset value to refi some of my larger props that I've already refi'd, or to take on private financing to increase some of my properties from 75-80% leverage to 90%.
At this point the challenge remains finding deals worth buying -- not finding funds to buy them.
Equity stripping has been around for some time as an asset protection strategy. Simply doing bogus loans against a property will not protect you. If you are not making payments, those "loans" will be disregarded by any court. Get insurance...liability, umbrella, etc. That is the fastest easiest remedy. BTW, trying to do anything once the possibility of a lawsuit arises will not save you. Courts will undo sales, mortgages, etc if they are done AFTER a potential lawsuit comes to your attention.
Equity stripping has been around for some time as an asset protection strategy. Simply doing bogus loans against a property will not protect you. If you are not making payments, those "loans" will be disregarded by any court. Get insurance...liability, umbrella, etc. That is the fastest easiest remedy. BTW, trying to do anything once the possibility of a lawsuit arises will not save you. Courts will undo sales, mortgages, etc if they are done AFTER a potential lawsuit comes to your attention.
There is two types of equity stripping being discussed: The equity line that I mentioned, which will put debt on the property (though not remove all equity as they might just go to 80-90% LTV). You do this and just not use it.
The other is the fake LLC loan trick. I think the point being made is this trick will stop most / some ambulance chasers. Obviously if you were to be sued and someone was to take a HARD look they'd see what you were doing.
@Natalie Schanne We just attended this seminar in Milwaukee. Tons of useful info and what you described is what Bill Noll described. @John Thedford This is interesting because Bill Noll seemed to think this was the way to do things, take care of your accounting and protect your assets. As for payments, in this arrangement he described, you have an LLC, and a partner entity you control. Your partner entity( a Wyoming Corp) makes a loan to you for the amount of your equity or near that amount that's locked in a property. You create real loan docs, showing an actual legal transaction, and you control amortization so you can create whatever loan terms you want. An owner can set whatever payment schedule they want, they can set zero interest rates and payback terms of 50 years if they want to. As far as he explained, it's the best system to protect your assets.
If you are correct he states you can do -0-% interest payback, you are creating a bogus loan, imputed interest, and an easy wall to defeat in any court of law.
If you are correct he states you can do -0-% interest payback, you are creating a bogus loan, imputed interest, and an easy wall to defeat in any court of law.
@John Thedford I guess my question to you is have you ever seen this method of asset protection have it's "veil pierced"? Bill Noll claims to be unaware of any successful piercing of the structure. I don't exactly recall him saying you could use 0% interest rate, so for giggles, let's say its 1% amortized over 50 years. For example, Habitat for Humanity gives the families a no money down principal only loan for 20 years. Is it your position that because it has a zero interest rate that in that situation it is a "bogus" mortgage loan?