Real Estate Investment Tips and Strategies : Why You Should “Mortgage” Your Free and Clear Properties
I was on a coaching call with one of our students the other day, and we got on the subject of free and clear properties. He has done several deals now and is really getting his feet wet in the real estate game. He purchased a couple properties recently and just finished with the renovations. He owns the houses free and clear and wants to pull his money back out through a refinance. His plans are to hold on to the properties and use the cash from refinances for his next deals.
This brought to mind a couple suggestions for his free and clear properties that would potentially save him a bunch of money and protect his assets at the same time.
Two Reasons to “Mortgage” Your Free and Clear Property
When I say “mortgage” your free and clear property here, I do not mean bring in a new loan and leverage your property. I am suggesting to file a mortgage against your property from an entity that you are familiar with.
1. Save Money when Refinancing
If you foresee yourself wanting to pull out money from a free and clear property down the road, here’s a good tip.
The rate that you could get on a rate and term refinance is typically much better than a cash out refinance. This could easily translate into saving tens of thousands of dollars over the life of a loan. If you own a free and clear property and want to pull out some funds, you’ll have to do a cash out refinance.
BUT, what if the free and clear property you owned, had a mortgage on it that you were familiar with. You could apply for a rate and term refinance and you would simply supply the payoff on the mortgage for closing. The mortgage is paid off but little does the bank know, it goes right in your back pocket!
You get a rate and term refinance, save a bunch of money, and get the cash you wanted. Win-Win-Win!
2. Protect Your Assets
Let’s say that you own a free and clear property and are doing some renovations. You’ve got a team of contractors working away steadily until one day, Joe Contractor falls off the roof. And come to find out, he wasn’t even licensed.
Joe Contractor is feeling pretty down on his luck as he lays in the hospital getting better. As he is watching Jerry Springer, he gets a great idea.
Why don’t I sue Mr. Deep Pockets Investor since he’s such a wealthy land barren?
Joe Contractor calls his attorney and his attorney finds out that the property is free and clear. Soooo, the attorney gladly takes the case. “With all that equity, there’s plenty to go around,” says the attorney.
Now, you’ve got a lawsuit on your hands, your rehab project is on hold, and you watch as your investment dreams turn to nightmares.
Or, you “mortgage” the property from an entity that you’re familiar with. The same attorney looks into the situation for his down and out client, but this time, he sees that there isn’t any equity in the property. The attorney calls back Joe Contractor and let’s him know that he’ll gladly take the case, but it’s gonna cost him . . . A LOT!
Joe Contractor doesn’t want to throw his money away and probably files for disability or something. Anyway, you successfully navigated away from a big headache by playing your cards smart.
If only to protect your assets, “mortgaging” your free and clear properties is a great way to minimize risk!
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Patrick Riddle:
Dusty Keefe:
Unfortunately, I don’t have any free and clear properties to use these tips for but awesome information.
And by the way, the webinar was great last night. Thank you so much for all the free resources.
I haven’t ever thought about that to get a rate and term refi. I can use that idea with some of my clients.
Great tips!
Are you going to be doing the private money webinar again soon?
What are the pros and cons of starting a corporation for yourself? I have heard from a few sources that sometimes this is a good idea to separate the business part with personal houses/cars/money etc in case someone sues. Wasn’t sure if it was a corporation or LLC, or something like that…
I haven’t used a corporation in my business ventures yet. Definitely a good idea to use some kind of asset protection strategy though.
We use land trusts as our primary asset protection strategy for our real estate portfolio. If you want more info on trusts, posts on the subject are under the business management systems and tools category.