Limit liability between individual properties and myself.
Member since 2010 · 27 posts · 1 vote
Hi -
Getting my first SFH property in my name. Since it's my first property, I haven't set up a business structure. How do you limit liability as a landord for your tenant's neglience?
Heard some folks say get renter's insurance and other's say get an insurance umbrella coverage. A few investors I talked just haven't plain thought about it. Just worried someone might sue me as the landlord owing to my tenant's neglience.
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.
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.
Thanks Bryan. Do plan on getting the fire insurance.
Also, I apologize I meant to say make the tenant pay for renter's insurance (don't know if renter's insurance will pay for someone injured on the property, but will talk to an insurance agent).
Also, plan on getting an umbrella policy and eventually through an LLC.
Talked to 3 investors in the Dallas area and they each have 2 + properties. They said they never really thought about it.
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.
I'd really love to see a simple answer from someone with credentials to back it up but I've never seen it.
(You know the drill - "I don't play a doctor on TV so don't treat this as legal advice" - or something similar.)
When I quizzed my real estate-savvy CPA she has her business under a (large) umbrella policy and no LLC protection, relatively cheap premiums on that. Since LLCs are a tad expensive in California maybe that's a simple cost/benefit trade off for her.
From my reading of what 'fire policies' provide there's NO liability coverage, it's purely for rebuilding your property.
A separate liability coverage line item should be added to your insurance policy, I've got mine set up for $1M. But then, I'm a small potatoes landlord :D
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.
If you mean her CPA business, it may not be elgible to be in an LLC. Don't know about CA, but CO has a list of business that cannot be in LLCs. Mostly professionals, like CPAs, but also doctors and lawyers. I believe the idea is that an LLC can't be used to protect yourself from yourself. If you fall into these professions, then by definition, you're on the hook for your actions and advice.
My landlord policies do include liability. That may be the sort of policy Bryan's referring to.
Whoah, two response from two of the Best. I'm honored.
I wouldn't worry too much about sticking one SFD into an LLC. It can be costly to set up and depending on the state, may not offer all that much legal protection in that some states, LLC's are easier to pierce than other states.
I have front and back end coverage. My front end coverage comes in the form of a landlord policy that covers fire and other damages as well as slip and falls and so on. Having just had a disgruntled tenant's kid torch one of my homes, I am damn glad to have had the coverage in place. The back end comes in the form of an Umbrella policy that I have. That means if I get in a car wreck, the umbrella kicks in for anything over my auto limits and keeps my assets from going to someone else.
If you are going to be doing some major rehab work to your rentals, then you'll want to look into a Builder's Risk policy as well. Also, a loss of use rider in your landlord policy would be good. This pays the rent for a period of time when your place gets burnt down.
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.