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Forums » Tax, Legal Issues, Contracts, Self-Directed IRA » Protection of your personal assets: LLC or increase insurance?

Protection of your personal assets: LLC or increase insurance?

27 posts by 17 users

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· lubbock, Texas


WOW, were were looking into putting our few units into an LLC to protect our personal assets in case tenants sue, and my accountant just advised me that apart from paying to FORM an LLC, there will also be an 800$ tax/year for California (we live here). The accountant expressed his disbelief in the advantage of creating LLC and recommended to increase our insurance.
How do you guys protect your personal assets?
Thank you!
Edita :)



· Indianapolis, Indiana


Depends on your preference, but in my case, Indiana is pretty landlord-friendly, so a $500k insurance policy per unit, plus my $1m umbrella policy lets me sleep at night.



Real Estate Investor · Northern, California


For me, an insurance policy on each property plus a separate umbrella policy is enough. I don't see the need (for me) for an LLC on top of that, especially considering the costs you mentioned. I actually have a friend who is lawyer who could form the LLC for me, but the $800/year tax is just something I can't see paying.



Wholesaler · Memphis, Tennessee


More insurance over LLC all the time.


Small_buymemphisnow_stacksCurt Davis, Buy Memphis Now
E-Mail: [email protected]
Telephone: 901-207-8977
Website: http://www.BuyMemphisNow.com
KAIZEN Realty 901-221-4041


· Phoenix, Arizona


I thought placing your property in an LLC discourage litigation in the 1st place? Is my logic flawed?

2 scenarios:
Say Problem Renter A slips on the stairs going up to the house gets injured and decides to consult an attorney.

Insurance Scenario:
The attorney see's it is personally owned by you and assumes you probably have an insurance policy and assets worth hundreds of thousands of dollars (insurance, umbrella policy, personal home, retirement accounts, kids college funds, other properties, etc.). He files a lawsuit for $5 million dollars. Even if they are only awarded the value of your umbrella policy or your win outright, you still lost because you had to pay your own attorney's fees and lost countless $ due to the time in litigation.

LLC Scenario:
The lawyer looks at the house and see's it is valued at ~$100k, but leveraged at 75k. If structured properly none of your personal assets are at risk. There is only 25k of equity for him to steal. He tells Problem Renter A it is not worth their time.

You can get a Wyoming LLC for only a couple hundred $/ year. Probably about the same cost as an umbrella policy and you don't have to worry about some judge telling some guy you owe him your life's worth.

I am new to real estate investing, so someone please tell me if my logic is flawed as this is how I intend to own rental properties.



· lubbock, Texas


@Mark Spivey Here's what my research showed:
-when u put ur property into LLC, INSURANCE RATES are HIGHER, and it's more difficult to GET insurance- loss of income
-you have to create LLC in a state you live, otherwise it will NOT be protected under the LLC, since you have to pay taxes/fees depending on your state. We have properties in CA and NV, and have to pay 800$/year tax for CA, amd 350$/year some kind of fee for NV - loss of income
-you have to transfer the property's title into the name of LLC,which will cost 300-500$ in attorney money-loss of income. And, there's no guarantee your insurance carrier will no drop you! I called mine: they will drop my policy if I wanna put it into LLC..

Overall, if you are just starting out and do not have lots in assets, you are fine having a 2mln umbrella over EVERYTHING that u have: cars, homes, etc.



· Phoenix, Arizona


Originally posted by Edita D.:

-you have to create LLC in a state you live, otherwise it will NOT be protected under the LLC, since you have to pay taxes/fees depending on your state. We have properties in CA and NV, and have to pay 800$/year tax for CA, amd 350$/year some kind of fee for NV - loss of income

That runs contrary to what Garret Sutton says. Maybe because it is CA where it's very renter friendly and easier to "pierce the veil"? I think CA LLC's are the weakest around. I don't claim to be an expert. I'll do some more reading when I get the chance and post back.


-you have to transfer the property's title into the name of LLC,which will cost 300-500$ in attorney money-loss of income. And, there's no guarantee your insurance carrier will no drop you! I called mine: they will drop my policy if I wanna put it into LLC..

I suspect that dollar figure you quote is highly dependent on many factors. I know CA fees are among the worst around, and NV's used to be cheap, but are now getting fairly expensive in their own right. So I would encourage people to check it out on their own.


Overall, if you are just starting out and do not have lots in assets, you are fine having a 2mln umbrella over EVERYTHING that u have: cars, homes, etc.


Lets take my previous example and assume I have 1 million in assets. I buy a 3 million umb policy. What if there is faulty wiring in my house and it winds up burning down several properties and I get slapped with the $5M lawsuit? I would lose EVERYTHING! Personally, I simply don't want to assume the potential risk of exposing my life's work to our judicial systems whims, just to gain an extra 1-2% ROI.

Seems to me this is a very important decision that shouldn't be taken lightly. I wouldn't trust me or anyone else. I would treat it as due diligence and research it to the last decimal.



SFR Investor · Kansas City, Missouri


Consider the method by which you structure the ownership of assets as your "castle walls and moat" around what you want to protect. Think of insurance as the "archer in the watchtower"...two different mechanisms that function together.


E-Mail: [email protected]
Telephone: 888-741-8454
Website: http://www.nreinsurance.com
http://www.linkedin.com/in/timnorris


Real Estate Investor · Santa Rosa, California


Mark, I think your doomsday scenarios would likely play out differently in the real world. In your first "insurance scenario", your insurer would be paying for your legal defense for a covered claim. In your "LLC Scenario" you would pay your own legal defense unless you had insurance, in which case it would be the same as your insurance scenario.

In your later post about the $5MM lawsuit with the $3MM policy limit, what would likely happen is your insurer and the plaintiff would likely settle out of court for an amount within the policy limit. If you had a ton of assets, the plaintiff might not agree, however. Lets say you are worth $10MM, the plaintiff will refuse to settle for the $3MM insurance proceeds because they think they can get the extra $2million from you. Simple solution: get a $10MM umbrella policy.

The LLC may provide you with some asset protection by discouraging lawsuits, and it may not. It all depends on how much you are worth, how much the LLCs are worth, etc. if you have a lot of various exposures (houses, apartments, medical practice, a restaurant, motel, etc) LLCs provide some separation of liability so that losses from one exposure don't wipe you out across the board. Regardless of all of that, insurance and good risk mitigation is always your first line of defense.


Small_praxisBrian Burke, Praxis Capital, LLC
E-Mail: [email protected]
Website: http://www.PraxCap.com


Real Estate Investor · Michigan


There are a lot of opinions on this subject.

One thing that I have run into is landlord tenant court. In my state, it is up to the court as to whether an LLC needs a lawyer. Some courts will let an LLC owner represent themselves, but other courts say that a lawyer must do it. Also, the insurance and costs are another factor.

One lawyer that I know told me that an LLC is a waste of money and paperwork. He said that in my state, the biggest judgment against a landlord ever was 1 million dollars. He suggests having that much liability insurance and everything is fine. He also told me that almost all lawyers will go after the insurance amount and nothing higher. They want the easy money and don't want to go after your assets.



Real Estate Investor · Pleasant View, Utah


If LLC is the route you choose, do you form an LLC for each property? Thought being that if you own say 10 properties outright and you are sued because of an issue at one, if you form LLCs for each property you mitigate your risk.

My CPA says that if you do have multiple LLCs you'll have to prove in court that you operate each one as a completely independent business.

My choice thus far has been to form one LLC for all of my properties and carry a 500k landlord liability policy on each one and also 2m in a personal umbrella.

Love to hear any suggestions.



Residential Landlord · San Jose, California


To what extent can putting things into a non-revocable trust help?

Michael



Landlord · Hendersonville, Tennessee


Both ...

We have a $2M Umbrella, and hold our prop's in a single LLC

As for non-revocable (irrevocable) Trust's -- I don't think I'd use one for Rentals. For an estate, cash, etc.... yes. Investors tend to move in & out of rentals at a whim. Should that neighborhood go south quickly, you would NOT be able to get out because the trustmaker pretty much gives up all control.

I'd stick to insurance and entity asset protection when it comes to rentals.



Real Estate Investor · Sacramento, California


As Rob K suggested, plaintiffs attorneys want to collect and settle as soon as possible. If there are adequate insurance limits they won't go to the trouble of trying to attack your personal assets. Judgements above and beyond the insurance are not easy to collect. If you have $2M or more in liability limits, the attorney will take the quick settlement and pocket their 30%.



· New York, New York


Is this true? I live in NY but have Florida investment properties in Florida LLC's..

-you have to create LLC in a state you live, otherwise it will NOT be protected under the LLC, since you have to pay taxes/fees depending on your state. We have properties in CA and NV, and have to pay 800$/year tax for CA, amd 350$/year some kind of fee for NV - loss of income



Real Estate Investor · Santa Rosa, California


Joe, I have a Delaware LLC for a Texas property, but I had to register the LLC as a foreign entity in TX. I also have a couple of Texas LLCs for Texas properties. I live in California. I do not have to register the LLCs as foreign entities in CA because there is no business activity in CA. If I also owned CA properties in these particular LLCs, I would have to register them in CA and pay additional fees. I hope those examples are helpful in evaluating your situation.


Small_praxisBrian Burke, Praxis Capital, LLC
E-Mail: [email protected]
Website: http://www.PraxCap.com


· Orlando, Florida


Originally posted by Edita D.:
WOW, were were looking into putting our few units into an LLC to protect our personal assets in case tenants sue, and my accountant just advised me that apart from paying to FORM an LLC, there will also be an 800$ tax/year for California (we live here). The accountant expressed his disbelief in the advantage of creating LLC and recommended to increase our insurance.
How do you guys protect your personal assets?
Thank you!
Edita :)

I'm not a lawyer, but IMO, if you equity stripped the properties through mortgages and liens and then put them all into one LLC that would make the annual fee affordable and provide a good degree of safety. If the properties are all free and clear you could be taking a bit of a risk by using one LLC. I wouldn't create multiple LLCs at $800/yr unless I had a lot of properties.

What I am doing is putting "high risk" properties (so far only one) in LLCs and keeping the rest in my own name under an umbrella.



· Orlando, Florida


Originally posted by Brian Burke:
Joe, I have a Delaware LLC for a Texas property, but I had to register the LLC as a foreign entity in TX. I also have a couple of Texas LLCs for Texas properties. I live in California. I do not have to register the LLCs as foreign entities in CA because there is no business activity in CA. If I also owned CA properties in these particular LLCs, I would have to register them in CA and pay additional fees. I hope those examples are helpful in evaluating your situation.

@Brian Burke

With a Delaware LLC, don't you still have to create a management company (LLC) in the state where the rental(s) is, with the Delaware LLC as the holding company, for it to work? This is what my attorney told me.



Real Estate Investor · Santa Rosa, California


We did not. The property is held in a Delaware LLC (which was a requirement of our lender, go figure) and that LLC is managed by my California LLC. The property is in TX. We just had to register the DE LLC as a foreign entity in TX.


Small_praxisBrian Burke, Praxis Capital, LLC
E-Mail: [email protected]
Website: http://www.PraxCap.com


Residential Landlord · Dallas, Texas


@Joe B. is absolutely correct about how it works with plaintiff's lawyers. (I know because I am one, though I don't sue landlords for obvious reasons.) The only other personal observation I would offer is that getting a million dollar or even two million dollar policy will probably protect you from most claims.





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