LLC or Umbrella Policy?

11 Replies

As a long term, buy and hold investor, should I hold title to the property in an LLC to increase asset protection or is having an umbrella insurance policy enough? or both?

Here's how I see it: I would want the umbrella policy anyway. Nobody wants anything bad to happen on their property, and a good landlord will do what they can to minimize the risk of that happening, but sometimes sh*t can happen where you actually are liable . If someone got injured due to a problem at your property you would want to have insurance that would cover it, right? Umbrella coverage is usually pretty cheap, too.

I have yet to hear a completely convincing argument for using an LLC for smaller sole proprietor properties.

Originally posted by @Jean Bolger :

I have yet to hear a completely convincing argument for using an LLC for smaller sole proprietor properties.

Me either. In fact having an LLC will prevent you from representing your property in court for even an eviction hearing. From what I have read it is also harder to buy property in the name of the LLC.

Despite what you read in the news most lawsuits are not huge settlements.  Having a million dollar umbrella policy is more than enough.  

Start with an umbrella but as you pick up more houses you may want to form LLC's. I have been told by different agents that I have too many rentals in my personal name to get an umbrella policy. I started a couple LLC's and can at least take a step in better protection. Also, a higher liability coverage (like 1 million) could be a good way to go on each of the houses if you can't get an umbrella policy or just want the added protection.

Originally posted by @Troy Young :

 I have been told by different agents that I have too many rentals in my personal name to get an umbrella policy. 

I did not know this was an issue.  How many is too many? 

@Steve S.

You may also want to ask your real estate attorney about the benefits of a Delaware Statutory Trust. Better than LLC's (while offering the benefits of a Series LLC) for protection, less paperwork (no minutes, etc.) and more anonymity.

Steve: I was told 10 was the limit for me. So if I held 10 or less personally and the rest in an LLC (or multiple LLC's) it (having an umbrella policy) could work.

Steve S 

I have spent years learning the hard way about asset protection. Everyone is going to and should have a different opinion on protecting their own assets. But don't take this lightly. If you want to own rental property in your own name, if and when you run into a litigation situation, ALL of your personal assets could be lost. 

When a company owns the rental property, the company may lose it's assets, but your personal assets should be safe if you structured the company properly.

As for insurance, it is always extremely important to have proper insurance. But, insurance may not protect  you if:

1. If there is proof of your negligence

2. A civil suit is brought against you

3. Divorce

4. Your untimely death ( personally held assets may end up in probate )

5. And countless other reasons

My point is, why work your *** off to build a portfolio of property and take the chance of losing it all because you didn't educate yourself on ALL of your options. Whatever you decide, it will only affect you. The rest of us giving our input have NOTHING to lose.

Choose wisely.

Happy Investing

Derek Dombeck

On the above.

1. Insurance covers your negligence, that's mainly what it covers.

2. If there is a civil suit, that is either do to your negligence or tortious actions (one item of note here).

3. Divorce? Actually an LLC complicates the issue as the judge will split the business asset, in theory it's more costly to have an LLC as transfers cost more.

4. In death your LLC is a personal asset included in probate.

5. There are reasons, but in my opinion the burden of taxes, compliance, hiring an attorney for anything that happens, it's just too great for the small benefit of not payin a few hundred for umbrella protection.

The note above, to have torts covered, you need to make sure "personal injury" is covered. It is usually a line item on coverage.

About limits on houses, we have some insurers that state 4 houses. Which is fine, that's why we have other insurers that state unlimited houses. We even have insurers that will write over 22,000 houses, almost all states, one policy. They'll do the same with three houses too. So it just depends on the insurer.

my recommendation is to have both a llc and a umbrella policy

I would go ahead and pick up an Umbrella Policy ASAP. I got one when I picked up my first property for about 250 a year. Then as you grow decide the point where an LLC starts to make more sense.

Also Umbrella Insurance is a smart idea even without a rental property.  I know a guy who got in a fender bender with a very sue happy person who sees him as her retirement fund. He's been in court for years because the amount she is seeking is above the 250k that his auto insurance is for.  

Originally posted by @Derek Lacy :

On the above.

1. Insurance covers your negligence, that's mainly what it covers.

2. If there is a civil suit, that is either do to your negligence or tortious actions (one item of note here).

3. Divorce? Actually an LLC complicates the issue as the judge will split the business asset, in theory it's more costly to have an LLC as transfers cost more.

4. In death your LLC is a personal asset included in probate.

5. There are reasons, but in my opinion the burden of taxes, compliance, hiring an attorney for anything that happens, it's just too great for the small benefit of not payin a few hundred for umbrella protection.

The note above, to have torts covered, you need to make sure "personal injury" is covered. It is usually a line item on coverage.

About limits on houses, we have some insurers that state 4 houses. Which is fine, that's why we have other insurers that state unlimited houses. We even have insurers that will write over 22,000 houses, almost all states, one policy. They'll do the same with three houses too. So it just depends on the insurer.

I am definitely an advocate for BOTH insurance and proper entities. @Derek Lacy, the whole reason of structuring an LLC for example, is to decide ahead of time how assets will be divided in the event of divorce, death, partnership disputes, etc. Why let the judge decide after the event has occurred, when you can have these Issues addressed from day 1 in your corporate docs or operating agreement. The key is not to use a boiler plate doc package from somewhere like legalzoom.com, but to actually structure each entity to you personal situation.

I would much rather spend an extra $1000 to form an LLC to protect my equity and assets than hope my insurance policy covers me when I need it.

Again, I believe you should have both. The right insurance is very important. 

Happy Investing

Derek Dombeck

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