Is it risky to own a debt-free rental property?

[Steven Jones]

I enjoy thinking of the many benefits of owning rental properties that are free and clear of debt. However, I recently began considering some of the potential disadvantages of debt-free rental properties, especially for a beginner real estate investor who can use the equity to build the business. I also considered the potential risk associated with debt-free rentals. I reasoned that all investments have risk, and, for a real estate investor, the risk increases as the amount invested increases. Thus, if a rental property is owned debt-free, than 100% of the equity is exposed in terms of lawsuits, for example. This kind of exposure exists even if the property is owned by an LLC. Of course, one way to mitigate the risk is to properly insure the property.

1. Any comments on my thoughts about risk? Is my thinking correct?
2. Can anyone propose other potential risks in owning debt-free rentals?
3. If you agree that there are risks associated with owning debt-free rentals, are the risks offset by the benefit of higher cash-flows? 

[Joe Villeneuve]

Both are correct.  One solution is a solution for both...refinance.

Another solution is a variation of the first solution...with a twist.  Have one of your own companies put a lien for a value equal to 80-100% of the value of the property.  If there was a lawsuit, and you lost it, and the property with it, the winner would have to pay off the lien first...which is you.