BiggerPockets

Renter's insurance won't help...you aren't renting. You need an owner's policy (my is a fire policy) and an umbrella policy is nice to have too.

A legal entity is useful too for liability protection and sometimes for tax advantages. I have generally seen people use LLCs or FLPs for holding property. You may check into using a series LLC too...I am planning on possibly switching to that for my rentals going forward and I think Rich Weese uses this too.

This is a discussion you should have with an attorney. People on a message board may be able to help point you in the right direction, but your personal circumstances may influence the setup one way or the other. Umbrella coverage in a simple entity are a good place to start.

The fire policy will likely cover the tenant liability problem. The umbrella policy is more of a failsafe if you get sued and protects up to a certain dollar amount.

If you use the umbrella policy in conjunction with the series LLC you can likely choke off any potential liability completely without having to run and maintain separate entities. That is what I would recommend you look into and is what I would do now if I could set it up again.

You may also look into using a shell entity as the managing member or GP for the entity that owns the property or properties. Entity lawyers are not all created equally and you should look for a specialist to assist with this...not a general lawyer type. Someone that also has a CPA and specializes in real estate would be the best to have.

Thank you for your insight.

There is no sense to have a LLC if you have nothing to protect and/or no income to offset in the case of flip income. That is why my answer above said it depends on your personal circumstances, tax bracket, etc.

I am pretty sure my fire policy carries liability protection although it may be a separate rider as you pointed out. Talk to an insurance guy about it. My guess is that different companies bundle the products differently and thus it won't be uniform. That may be bad info though...I am not an insurance salesman.

Whoah, two response from two of the Best. I'm honored.

If you mean her CPA business, it may not be eligible to be in an LLC.

You could be right - well I'm pretty sure your 100% right since you're light years ahead of where I am on the learning curve. I was specifically talking about what business entity to set up and how to protect assets with her. She didn't mention any limitations on what can be in an LLC. Just said that she chose to go with that option of covering herself.

My landlord policies do include liability.

Being the pedant that I am I specifically quizzed the insurance agent on this before I bought so it wasn't clear if this was a standard part of the Landlord package or extra.

If you are looking to protect yourself from a liability claim, then you have to do as much as you can to create layers of protection. Anyone can sue anyone for anything so there is no such thing as absolute protection. There are some things you can do to limit your risk.

Have your tenant get renters insurance for two reasons. The first is most renters insurance policies have a fire legal liability limit. That means if the tenant is the cause of the fire to your property, you can recover your loss against the tenants policy. The second reason is because if someone is on the property is injured due to negligence on the tenants part, the attorney has a policy he can go after in litigation. If the tenant doesn't have a policy the attorney is going to look for other parties to be held responsible. Tenants are generally noncollectable, so a landlord makes a good target. Some landlord policies give a discount for your tenant have renters insurance because of the reduced risk to you and your insurance company.

Forming an LLC or Corp does give you another layer of protection. This doesn't guarantee that you as the owner of the LLC can't be sued but it does add another layer of protection which makes it harder for you to be personally responsible.

An umbrella policy is always a good idea if you are concerned about your liability risk. An umbrella extends your underlying insurance coverage up to the amount you purchased. In other words you property may have a 300k liability limit and the umbrella would have 1 million. Anything above 300k would be covered by the umbrella. It is usually less expensive to extend coverage with an umbrella and it also adds gap protection to cover areas that may not even be covered by the umbrella policy. Most personal umbrella policies cover not only your investment properties, but also your home, auto, boats, motorcycles, and stray golf balls on the course.

When it comes to landlord policies like anything else I always recommend working with someone that knows the risks and products that are available to protect you.

Thank you everyone - it was very informative. It's amazing what you can learn in this website over a few days vs. reading a book. Love the ideas bouncing around.