Rental Property Mortgage Pay-Off -- Liability

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Ten10Power
Posts: 3
Joined: Sun Nov 18, 2018 11:50 am

Rental Property Mortgage Pay-Off -- Liability

Post by Ten10Power » Sun Nov 18, 2018 12:08 pm

Hello BH'ers

I have a rental property (in washington state) that will be resetting to a 5.25% interest rate this upcoming January. I have been putting off refinancing for 2 years now since the rate has been manageable so far.

With the new interest rate, I am breaking even on rent "vs" mortgage.
I have been working out of country for while now, and getting refinance is pain given the back & forth it requires. I am considering paying-off mortgage to minimize hassle and increase cash-flow.

However online literature and few friends suggested that having no mortgage increases my liability.
Is this true ? i.e having a mortgage makes me more safer (i.e lender will be on my-side with skin in the game?)

Are there any steps I can take to mitigate risk while paying off loan? like If I take umbrella policy with good liability coverage etc.

runner3081
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Joined: Mon Aug 22, 2016 3:22 pm

Re: Rental Property Mortgage Pay-Off -- Liability

Post by runner3081 » Sun Nov 18, 2018 1:40 pm

That doesn't seem to make any sense. Liability is with you, the homeowner, not the lender.

Derby
Posts: 144
Joined: Tue Sep 09, 2014 1:56 am

Re: Rental Property Mortgage Pay-Off -- Liability

Post by Derby » Sun Nov 18, 2018 4:18 pm

Your friends are wrong. Your solution is correct: Have sufficient insurance.
Carpe Diem.

Topic Author
Ten10Power
Posts: 3
Joined: Sun Nov 18, 2018 11:50 am

Re: Rental Property Mortgage Pay-Off -- Liability

Post by Ten10Power » Fri Nov 30, 2018 11:25 am

Thanks for responding. Bumping up if any one else can respond.

MrsBDG
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Re: Rental Property Mortgage Pay-Off -- Liability

Post by MrsBDG » Fri Nov 30, 2018 1:24 pm

If you pay off your mortgage you have more to lose, technically, in that all the equity in the is now vulnerable to attachment if a suit is won. However, chances are if you had that cash invested elsewhere, that, too, would be vulnerable if someone won a suit against you.
I have paid off my rentals and have a good umbrella liability policy.

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unclescrooge
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Re: Rental Property Mortgage Pay-Off -- Liability

Post by unclescrooge » Fri Nov 30, 2018 1:37 pm

Having a mortgage discourages frivolous lawsuits. If a lawyer is working on a contingency basis the first thing he will do is a title search. If the property is paid off he sees dollar signs. If there are two mortgages and little equity, he'll probably not want to waste time on this case.

You can pay it down, but I wouldn't pay it off. The title search will still show the original loan amount.

Of course, you definitely want adequate liability insurance for legitimate claims.

megabad
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Re: Rental Property Mortgage Pay-Off -- Liability

Post by megabad » Fri Nov 30, 2018 2:57 pm

Ten10Power wrote:
Sun Nov 18, 2018 12:08 pm
With the new interest rate, I am breaking even on rent "vs" mortgage.
Why keep the property? A break even on rent vs mortgage is an immediate sale for me. Selling the property would be a very effective way to mitigate liability (with respect to that property).

I do not agree that having a mortgage has any direct affect on liability (it certainly increases your risk of loss of equity). As far as public exposure, most cheap lawyers around me would not do a due diligence search outside of a simple property search which will not return mortgage status (at least not where I live). Follow basic rules and you will avoid most ambulance chasers: own at least one beater car as a primary commuter, do not tell people where you live, do not tell people what you do (including real estate investing), and do not own homes in exclusive zip codes. If all else fails, have a massive umbrella policy, but realize that this may actually increase your risk of lawsuit since many states have silly discovery laws.

If liability is your primary concern, I suppose having a mortgage may help in a roundabout way (but not directly), because it will reduce the equity in the home and allow you to put that would be equity in trust for some (but not concrete) protection. But owning the house outright would reduce your overall liability more because you could then have an LLC hold the house.

euroswiss
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Re: Rental Property Mortgage Pay-Off -- Liability

Post by euroswiss » Sat Dec 01, 2018 9:54 am

megabad wrote:
Fri Nov 30, 2018 2:57 pm
Ten10Power wrote:
Sun Nov 18, 2018 12:08 pm
With the new interest rate, I am breaking even on rent "vs" mortgage.
Why keep the property? A break even on rent vs mortgage is an immediate sale for me. Selling the property would be a very effective way to mitigate liability (with respect to that property).

Agree, if all you cover with the rent is the mortgage then you are bleeding significant cash. Based on that alone, you should sell, unless you have some emotional attachment to the property.
As far as liability, a good umbrella policy is cheap and much better suited to guard against that.

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