Equity stripping is something of a varsity-level real estate move, but it’s also an asset protection classic for a reason. The whole idea is to make your property look extremely undesirable on paper, even if it’s a beautiful and pricey asset to behold. Today, we’ll be talking specifically about five ways to protect the equity in your homestead or personal residence, and you’ll be icing greedy litigants and creditors in no time when you follow our tips.
Ah, the homestead exemption, arguably one of the best “gimmes” a homeowner can get on the equity stripping front. Understand first that American law provides greater protections for our personal homes than any investment.
Now, the exact value of your personal homestead exemption depends on a variety of factors, including where you live. Each state’s formula for calculating homestead exemptions is different, so your mileage may vary. But everywhere that has a homestead exemption option is giving its homeowners a gift of sorts. For instance, one of this tool’s main uses includes capping creditors’ abilities to tap into your home’s equity to satisfy a debt. If your state offers an exemption, you should most likely take it (unless professionally advised otherwise).
If you do some research and learn your state doesn’t offer such an exemption, don’t fret. That’s what our next four tips are for, and you can make up the difference by using some of the other tools explained here such as home equity loans and lines of credit.
Friendly loans may come from actual friends or even institutions where you have a good reputation or rapport. Any loan with good terms or lien constructed deliberately for equity stripping likely meets the investing definition of “friendly” lending. There’s nothing inherently unfair, wrong, or illegal about receiving a favorable loan or gift from a person or business.
Of course, finding and securing friendly loans can be tough, particularly for newer investors or homeowners. Those who follow our next tip won’t have this issue.
Even seasoned REIs rarely know you can legally do this. Creating your own mortgage company for equity stripping is surprisingly easy, and incredibly effective. You use your own Traditional LLC to issue yourself notes. You can proceed to use it for your homestead or your investment assets, assuming your coloring within the lines of the law.
Learn more from our explainer on how to form your mortgage company and start your equity stripping strategy. This basic premise can be used to completely encumber a property, making it repulsive to the career litigant and (often more importantly) their attorney. After all, the lawyer who sees equity stripping knows they won’t be getting paid. Not until the mortgage is paid off, anyway. And given you’re the one setting up the terms, you can make this part easy.
Both home equity loans and home equity lines of credit (HELOC) offer handy tools for the homeowner in need of equity stripping. The loan version is limited to the amount of equity presently in your home. Those who take out home equity loans receive the equity value in a single lump cash sum, a “riskier” move for the lender than a line-of-credit.
By contrast, HELOCs are easier for most people to qualify for, and for many homeowners, easier to manage. When you have a HELOC, you only touch the money when you need it or for a planned reason. Both of these home equity-reliant options encumber your home further, serving your creditor and asset protection goals.
Qualifying seniors who own their homes outright may use second mortgages as both a way to get some much-needed cash on a fixed or dwindling income and for protecting their homes. Second mortgages may be difficult to qualify for, will be limited to seniors with high equity in the home, and can certainly have drawbacks, so learn the specifics about second-mortgages before considering using this type of encumbrance for equity stripping.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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