Unfamiliar to those without ample experience investing in the real estate industry, equity stripping is a strategy few actually know about, but many could actually benefit from. As a form of asset protection, equity stripping will witness homeowners borrow against the equity in homes they already own, not unlike a home equity line of credit (HELOC). In doing so, the asset becomes significantly less attractive to creditors with malicious intentions, hence the asset protection designation.
You see, creditors are much less likely to be interested in a property without any equity, as it may not be worth their time to pursue. As a result, equity stripping has become one of the easiest ways to protect an asset; in rendering it less valuable, it’s less likely to attract litigation in any way. It is worth noting, however, that there are exceptions and risks associated with this strategy. More importantly, be sure to consult a legal professional before taking any action on your own. An equity stripping asset protection strategy can be well worth your time, but it needs to be done right.
Equity stripping is a relatively crude way of explaining a simple asset protection strategy. More specifically, however, equity stripping refers to the process of reducing the amount of equity a homeowner has in their own property. A HELOC, for example, is recognized as a form of equity stripping, as borrowing against the property’s equity diminishes the homeowner’s equitable interest in it. In doing so, the property becomes less attractive to anyone who may have an interest in making any claims against the property. If for nothing else, the less attractive the home’s position looks, the fewer people will be interested in taking it. That said, equity stripping isn’t only a great method of asset protection, oftentimes it’s the only means of protecting an asset.
The theory behind equity stripping is rather simple: in limiting the amount of equity in a subject property, creditors and traditional lending institutions won’t go through great lengths to levy any claims against it. As Investopedia puts it, “owners can retain control over the cash flows and use of the asset while making the property unattractive to creditors attempting to administer some type of legal judgment.”
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As I already suggested, equity stripping represents an opportunity to protect an asset, not unlike an investment property, which begs the question: how does the process actually work? The answer isn’t nearly as complicated as many would assume, but still worth paying attention to.
Equity stripping will witness a homeowner make their asset less attractive to future creditors that may come for the property at a later date. In doing so, homeowners will go the extra mile to “encumber” their own asset with one or more liens. And while doing so may sound counterproductive, it can be quite effective. You see, in levying a lien against your own asset, you can actually protect it from scrupulous creditors.
Obviously, a lien levied against your own property from a creditor is bad news; it could very easily jeopardize your own asset. However, if the lien is of your own doing, it can be extremely useful in protecting your own asset. If for nothing else, a lien placed on the property will take precedence over any subsequent liens, with very few exceptions, of course. Therefore, if you place all of the equity in your home in an existing lien, then all future liens placed on your property will essentially be worthless to their holders. Simply put, your own lien will render any creditor’s liens moot.
There are exceptions to the rule, of course. Equity stripping won’t always work. Tax liens, for example, will trump any lien you can levy against your own property, and ruin any chance you have at protecting your own asset. Therefore, consult a professional who is well-versed in real estate law before taking any action of your own.
Investors able to take out a HELOC should be able to take advantage of the primary benefits of equity stripping as an asset protection strategy. As perhaps the most common form of asset protection, a HELOC will allow homeowners to strip the equity out of their home while simultaneously retaining access to a portion of the funds. If for nothing else, a HELOC will give you access to the equity in your home, whether you need it or not. As a result, creditors won’t see the value in coming after your home, as it has already been taken up the HELOC that you currently hold. That way, you have access to the equity (like a credit card) and the creditor doesn’t.
In addition to a HELOC, a home equity loan will allow homeowners to tap into their equity. With this technique, you are going to get the entire amount of your equity in cash upfront, but with a caveat: you’ll have to start making payments immediately because this type of loan puts the money in your hands the instant you decide to follow through with it.
Each of these strategies can stymie creditors by making the subject property less appealing. What’s more, they give you access to the equity that was previously in the home.
When executed to perfection, and as a compliment to a well-crafted strategy, equity stripping can serve to protect your real estate assets. More importantly when coupled with a limited liability company (LLC), equity stripping can simultaneously protect your property and yourself. However, equity stripping is not without risk, and it can get quite confusing to those that have never done it before. Therefore, it’s important to work with a legal real estate professional before making any moves of your own.