In real estate investing we often talk about how useful equity lines are for acquiring property. Having an open line of credit that you can access when needed to pounce on a property purchase gives you speed to operate in today’s hot market.
However, there is another reason holding a credit line is helpful: It can act as a undercover asset protection tool.
This is obviously not legal advice as I am not a lawyer, but it is still an interesting piece of information.
Using Equity Lines for “Asset Protection” in Real Estate
Before we get into how an equity line can help protect you let’s talk about using an equity line for investing
Equity Lines to Acquire Real Estate
If you ask anyone that has an equity line they will likely tell you how they love it and have used it many times over. I can speak from experience to that. I have an equity line on my primary residence that I have tapped several times to make “cash” offers on investment properties.
After acquiring the property (and likely doing some value add renovations) I do a cash out refinance into a long-term loan and pay the credit line back to zero.
That is the beauty of the credit line. You don’t have to use it and you only pay on it when you hold a balance. There are several types of credit lines with home equity lines being the most commonly known. Other types are business lines or personal lines of credit.
If you own property and have a lot of equity in it you may want to see if it makes sense to access that equity with a line of credit.
Equity Lines to Make Your Assets Less Attractive (to lawyers)
When you take out a home equity line you are essentially stripping equity from your home and making it accessible for you to use.
For example, you have $100,000 equity in a property and the bank gives you a $80,000 equity line (80% loan to value).
Two things have now happened:
- You have gained access to $80,000 worth of the equity in your home and can use it to invest in more real estate.
- As mentioned above, you have stripped 80% of the equity in your property away.
By stripping away that equity you are a less enticing target
Before the equity line you had $100,000 in equity that could potentially be sought after in a lawsuit, now you only show as having $20,000. By taking on the equity line “debt” you look much less appealing.
So when John Doe goes to the local slip and fall lawyer, they will look into your assets and see that there isn’t a bunch of “cash money” available for them to get paid on if they file and win the suit. It takes a lot longer to receive a property as compensation for damages than it does for a cash payment. This is much less enticing for them.
As stated earlier, just because you have an equity line does not mean you need to use it. You can leave it there as an “emergency fund” if that’s what makes you comfortable. Either way, it makes you look much less enticing on paper as a wealthy target that can afford a payout.
Even if you do have equity lines so your net worth looks lower, it doesn’t mean you want get sued. Insurance exists for a reason and you should always make sure you have adequate coverage. Umbrella policies are also a nice addition to the insurance you have on your individual properties.
And remember, regardless of what you do with equity lines – I always suggest being prudent with debt and not over leveraging yourself. Leverage is powerful, but when used wisely.