Liability/Insurance Question
Hey BP. I am looking at a duplex for my first home (to start by house hacking). Is there a primer anywhere on how to properly limit my liability or how to make sure that I have adequate insurance as a landlord?
From what I have read, I think that an LLC would not be a good choice for my situation. I think that I should probably get homeowners insurance and umbrella liability. Am I missing anything or completely on the wrong track with this? Thanks!
Stay away from an LLC @Zachary Miller. That can wait until you start investing with a partner. What you need is a standard landlord policy which offers the same coverage as a homeowners but costs a little more. You can even bump up your limits for short money and going with a $2500 deductible will save you money. Add a $1M liability policy as well. You'll be good to go. At this level I think even the Umbrella policy is overkill. Talk to a couple insurance agents in your area for advice.
Hello,
I agree with Bob.
Melissa
I have a different opinion on using an LLC. There was a great BP podcast (109) that covered this, and it gave reasons why you should form an LLC for any investment property. View it here. There is also a good document at this link that talks about asset protection. Bottom line is that insurance alone will not protect your assets.
As an attorney, I agree with the posters who say form an LLC for any investment. It doesn't matter if you have a partner or not. If you (or you with a spouse) have any personal assets, you should form an LLC. It's not an either/or proposition. You need an LLC and you need insurance. Boots and suspenders.
Originally posted by @Randi Plevy:
As an attorney, I agree with the posters who say form an LLC for any investment. It doesn't matter if you have a partner or not. If you (or you with a spouse) have any personal assets, you should form an LLC. It's not an either/or proposition. You need an LLC and you need insurance. Boots and suspenders.
What protection does an LLC offer that an insurance policy will not give an investor in the event of a negligence case such as an entrance that is not kept clear and somebody falls or any case where the landlord is found to be negligent? The problem is that attorneys (no offense) dont make money setting up insurance policies, they make money painting a picture of the worst-case scenario possible and convincing new investors with virtually no assets to protect these non-existent assets with an LLC that costs thousands to set up and maintain when you factor in filing fees, legal fees, and accounting fees. A blanket statement that says form an LLC for any investment is simply sending the wrong message.
One of the problems with insurance is that you can not predict the nature of everything someone may sue you for. One of my client's is being sued creatively by an adjoining retail condo for alleged illegal or negligent installation of plumbing. The insurance has already sent them the "reservation of rights" letter, which means it will defend the insured while reserving its right to jettison them later.
I'm not offended by what you stated, primarily because I advocate for buying insurance and think you're a fool if you don't. And by the way, if you have no personal assets to protect, then by all means own your property in your own name. But I hope for your sake, and that of your family, that one day you will have something to protect, and for that, I highly recommend forming an LLC.
Rob do you work for the plantif lawyers association? You post in every thread urging people not to form llcs claiming they are prohibitively expensive and legally worthless despite how many qualified and educated rebuttals you receive to the contrary.
@Steve B.Im not a lawyer nor do I play one on TV. I have yet to hear a compelling argument for a n investor to set up an LLC. The attorney above stated the insurance company is defending the case. If they dont, guess who gets sued. Im advocating for the thousands of investors that come onto BP asking about setting up an LLC because Robert Kiyosaki told them if they dont they aren't a real business...oh and if they are sued they will lose everything. So Joe Investor buys an owner-occupied three family for $200K with 5% down and before he collects his first rent check has a Series LLC set up in Deleware and four checking accounts. The LLC cost him $8K to set up to be sure his operating statement is iron clad and his corporate veil won't be pierced.
While I agree that some without assets may be spending too much time forming business entities and not enough looking for deals, it is important even for those with limited assets to avoid having judgments against them, since this ruins your credit. Business structures can help in this regard.
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I'm with @Rob Beland on this. I've yet to see an example where someone had any any type of claim/judgment that wasn't covered by adequate insurance, and an LLC would have saved their a$$. I am assuming one runs their business in a reasonable way without any fraud. As to the "plumbing issue" mentioned above, it obviously is an insurable event, otherwise the insurance co. wouldn't be defending. Would the suggestion be to ignore your insurance of you had an LLC, and pay for your own defense, then just BK your LLC of you lost?
Originally posted by @Steve B.:
Rob do you work for the plantif lawyers association? You post in every thread urging people not to form llcs claiming they are prohibitively expensive and legally worthless despite how many qualified and educated rebuttals you receive to the contrary.
I agree with Rob, especially for this OP, just starting out. We listened to the advice, paid a lawyer who set us up with an LLC, only to find out that the days ended when banks would give you a conventional loan then not care that you transfer it to your LLC. And lending to a new LLC was virtually non-existent, so it would have to be in our own name or secured by our own name, anyway, but with higher rates, higher fees, worse terms. No thanks. We dissolved the LLC and went with landlord policies and an umbrella.
Of course lawyers are looking out for their own interests, who isn't? However, there is a reason LLCs were invented, and there are numerous examples where insured people get sued for stuff that insurance will not cover. One example is fraud. Of course you don't intend to or knowingly commit fraud, but that won't keep you from getting sued and losing over a misunderstanding. Insurance will not cover this. Listen to the BP podcast I referenced earlier for an explanation. As far as loans are concerned, there are banks that will loan to you if you have a job and will back up the loan with a personal guarantee. I agree that the cost of lending for personal properties is lower than that of an LLC. One strategy is to set up a property management LLC (an operating Co.) and lease all properties to that LLC then sublease to end tenants from the operating co. Then there is a wall of separation between the asset and the entity that would get sued. Yes, an LLC is harder, but it can save you big time when you get sued. Even if you do not agree, listen to BP podcast 109 and determine for yourself. Ignorance is no excuse.
I agree you clearly SHOULD NOT form a LLC if:
1. You don't have significant assets worth protecting
2. It becomes problematic due to callable loan threats or inability to get loans due to the LLC (although you can still just personally sign for them if eligible).
However there are plenty of people with assets to protect who aren't in a a position where they need to borrow money and the corporate entity is preventing them from doing that. As I've also stated everyone should have an umbrella policy first and foremost.
In light of this there are a lot of people who should form LLC's for the reasons @Randi Plevy and other knowledgeable people have stated. To just say "don't get an LLC" should be only made on a case by case basis. Now with the OP as this is his first house, unless he has a lot of assets outside of RE he probably does not need an LLC.