Where do I even start with legal protection?

Question

I want to buy my first property. I have a good down payment saved. I have read an exhausting amount of information (including things here on BP) and truth be told, I am still completely confused about whether I should pursue an LLC or liability insurance. I would not even know where to start.

Thoughts? Direction? Help? LOL.

Matt Motil · Answer

You're going to get a ton of different replies on this one. Some will tell you to get an LLC for your investing, others will tell you a separate LLC for each property. Others will tell you just buy it in your name with a big insurance policy, others will tell you getting the LLC's and the insurance policy.

Ultimately at the end of the day, do you need an LLC and the insurance? No, not technically, but it's a matter of what will allow you to sleep comfortably at night.

I personally have an LLC for all my rentals and a separate general liability policy on top of the insurance for each property. This provides me the level of comfort that if the normal insurance runs out I have the umbrella policy in place.

It is more difficult to buy in an LLC than in your personal name, but we haven't had too many issues doing it.

Matt Motil · Answer

I would add that it's doable with some banks, but not all. I have had banks tell me that if I moved a property out of my personal name they will call the loan. I have called bank's bluff before and done it anyway. Sometimes isn't a non-issue, other times you're going back to the courthouse to change it back. Each bank is different.

Russell Gronsky · Answer

Disclaimer: I am not a lawyer and this is not legal advice.

What do you intend to do with your first property? If you plan on living in it, you can get away with home owner's insurance and umbrella insurance if the property is in an area prone to lots of natural disasters.

If you plan on flipping within a few months and no one will be living in it, you can get away with just insurance as well. Some people don't protect flips at all since they figure they are just selling it in a few weeks but beware of the law in your area. If an intruder hurts himself/herself while breaking in or robbing your property, they can sue you in certain circumstances and in certain places.

If you plan on renting it out, definitely get fire insurance (that's another way of saying tenant insurance) and ultimately, an LLC and a trust are the way to go.

However, while asset protection is the way to go and I completely support it, it is an added expense coming out of your pocket. An LLC has annual fees, not to mention if you are doing an LLC in a state where you don't live. Now you need an agent in that state that acts on your behalf. There are ways to do this and there are companies that offer this exact service but again....it all costs money. So it comes down to how much protection makes sense compared to where you are in your investing journey. You should certainly aim to get an LLC (or multiple LLCs) and trusts, and insurance set up on properties at some point down the road but when you are buying your first property, the added costs of all that asset protection may wipe out any profits you are making off your investment.

Your first step should be to find a real estate lawyer in your area and talk to them. You might even get a free consultation. And don't stress over the LLC right away, you can always move a property into an LLC later. The mortgages will still be in your name, and let the bank know when you want to move property title so they don't call their loan on you, but it is all very much doable.

Hope this helps.

Jennifer Bowen · Answer

Extremely helpful, all. Thank you! Yes, I was all set to go the LLC route, then noticed the annual fees and the fact that it's harder to borrow. I would have to put a rather large down payment to make it cash flow enough to make up for the fees.

Those of you who have them, how do you borrow money through an LLC?

Perhaps starting small with a rental property and liability insurance may be the way to go. I'll talk to someone and ponder on it more. But your replies have given me a lot to think about.

Where do I even start with legal protection?

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