MMMs -
I own a rental property that barely breaks even in cash flow. The reason I am holding on to it is so that I may choose to live in it a few years from now. I owe a decent mortgage on the property @ 4% interest per year. I have been holding on to some cash in my bank that pays below 1% per year. I am thinking of paying a large sum toward my mortgage on my rental property. However, what is preventing me to do so is that I feel that if my equity in the property goes up, it increases my risk for potential law suits. I think it is easy for someone to find out how much the owner of the home owes on the property. The more equity I have, the higher the risk of getting sued. I recently read a book by Brandon Turner from Bigger Pockets, and he also said something similar about making case against paying off a property.
Questions:
- Is my thought process/comments above justified? or do you think I am being unreasonable.
Appreciate any comments from other folks who own real estate.
I have a few thoughts-
-If your options for those funds are 1% savings account or paying down your 4% mortgage, then yes, paying off the mortgage would give the highest mathematical return. However, many on this site would advise you to consider investing in the VTSAX with an average return of ~7% instead of that <1% in the bank.
-When your property is barely breaking even, is that including maintenance, capex, vacancy and management (~40% of rents)? If it does not include these things, then the property is a drain on your finances. Sell it and either repurchase or better, rent, in that area if you decide to move back at some later point. If it does include all the costs, then I still would not keep it but would take into consideration intangibles such as your potential future use of the property.
-Is the property owned in your name? Or in a LLC? If the property is in your name and you lost a lawsuit, it will not matter whether the funds are shares of VTSAX in your taxable brokerage account, sitting in your savings account or equity in the rental house. It's all up for grabs. If the property is owned by a LLC, then it is prudent to keep as little equity as possible in the LLC as only the LLC's assets would be fair game.
Regarding the equity as a target for lawsuits. In the areas that I invest, a personal injury lawyer would be able to easily find out what the initial mortgage was for a property and the date it was taken out and cleared, if applicable. From their they would use an amortization table to estimate equity. For example, if you owned in your own name, they would see that Mr. cooldude2001 or 123 Main St LLC purchased a property for $200k with an accompanying loan for $160k on 1/1/2015. They would be able to estimate that the balance on the loan is ~$151k today for a current equity of $49k with zero presumed appreciation. The lawyer, during this initial is-mr.cooldude2001/123mainstLLC-worth-suing phase would not know if you had made more than the minimal payments on the loan unless it was paid off in full. Of course if the lawsuit went ahead, they would find out this information during the discovery phase.
(I am not a lawyer- this is my understanding of the process of personal injury attorneys from my experience as a real estate investor.)
