The Pros & Cons Of Equity Stripping

Equity stripping can be a critical component of your asset and creditor protection strategy. This tried-and-true tactic for making your valuables less attractive targets works by disguising the true value of the property in a controlled, legal manner. If you want to brush up on the topic, you’re in the right place. Learn more about the key pros and cons real estate investors need to know about equity stripping now.

Equity Stripping 101

You didn’t think we were going to give you advice without covering the basics first, did you? Of course not. Equity stripping is an umbrella term that describes any maneuver designed to remove the perceived value of an asset. In the real estate world, we usually do this through creative use of harmless debts or liens. The idea, in a nutshell, is to tie up the asset in so much financial or legal red tape that it is unattractive to both creditors and the folks who like filing lawsuits against us investors.

Equity Stripping For Real Estate Investors: The Pros

Equity stripping can be beneficial for several reasons, and is indeed a tried-and-true method of asset protection.. Here are some of our favorite things about this tactic:

  • Creditor and asset protection. Nobody wants an asset with no real value.
  • Traditional LLCs can be used for this process, even if it’s one you already own. Some investors enjoy this convenience.
  • Liens are as legitimate as loans, allowing investors to get creative with their use and financing.
  • Friendly liens. Agreeable financing is often possible since you’re often basically lending money to yourself.

These are just the very first of many benefits of equity stripping. But to be fair, let’s look at the downsides.

Equity Stripping for Real Estate Investors: The Cons

Rare is a good thing in life without a few drawbacks or trade-offs. Equity stripping is no different. Some of its significant possible drawbacks include:

  • Tax consequences for “friendly” loan arrangements and leans can be brutal. A CPA can help you avoid such problems.
  • Interest rates can be absurdly high on certain types of loans used for equity stripping.
  • Personal loans may not be taken as seriously if challenged legally.
  • Not all equity stripping tactics are created equally. Some are even risky, like taking out a second mortgage--a move that would be unwise for most property owners.

Many of these “cons” can be addressed or avoided altogether with an appropriate asset protection strategy. For example, a professional can navigate the legal and financial implications of the smartest tactics for you.

Is Equity Stripping Right for You?

Maybe. It’s important to weigh the pros and cons before making moves, but many investors find that on balance equity stripping does them far more good than harm. Your chosen legal, tax, and financial professionals can best help you make the right decision. All you have to do is provide a clear picture of your motives and situation. Keep in mind that with all of the equity stripping tools available, equity stripping in general is likely to be helpful to you. Which specific methods will work best for you is the question to bring professionals in on.

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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