Paid off property RISK

[Rahul Handa]

Hey guys, i just want to know if its too risky to ever pay off your mortage. I’ve been lots of research on this topic because all i want to do is own 5 paid off rentals and retire early. That is my goal but i have read again and again that if you have paid off rentals then you are putting yourself at risk for getting sued. I actually want to live out of country (low cost of living) for couple of years therefore i want fewer properties with paid off mortage to sustain my lifestyle. How can i protect my assests from this? I really can’t stop thinking out this issue im having and can’t seem to find an answer anywhere. If anyone has any intake on this then please let me know. Thank you.

[Joe Villeneuve]

First, the odds of being sued, when you figure the odds of you being sued are low, are actually very high.

Second, let's analyze what risk is by understanding the three parts to a risky situation.

1 - What is at risk
2 - Who is at risk
3 - Who is the risk.

Now, let's look at it from a banks point of view...because they are probably the experts in risk protection.  If you ask any lender, they will answer the three question above as follows:

1 - The cash they lend to the REI
2 - The Bank, because it it's their cash
3 - The borrower (REI)

OK, let's take this same logic and apply it to the asset as a whole, meaning all components of that asset...the cash put in, and the property itself:  (Assuming a 20% DP and 80% loan)

1 - 80% of what is at risk is the loan, and 20% is the down payment
2 - The Bank is 80% at risk, and the borrower (REI) is 20% at risk
3 - The Borrower is 100% of the risk.

Now, assuming 100% cash in (100% equity):

1 - The cash the borrower put in, which is the equity
2 - The REI is 100% at risk
3 - The REI is 100% the risk

Now a question from the person suing you (really from the lawyer's perspective):

A - If you are sued and lose, any liens on the property must be paid off. If the REI who lost the property doesn't pay off the loans, the property is still collateral, and will be foreclosed on. So, in this case, did the person suing you really win?

B - If you have no liens on the property, your property is vulnerable to a lawsuit...and a target.
C - If you have a lien on the property, you may still get sued, but there is no reason to go after the property in the lawsuit, because even if the person suing you wins...they lose.

So, you want to have protection, but not have to borrow the money ?  Loan the money to buy the property from another company that you own.  Make payments to that company like you would any other lender.  If you get sued, and they go after the property, stop making payments...and foreclose.