I am looking to buy my first rental property and am considering taking out an umbrella insurance policy in liu of an LLC.
This decision is purely about protecting my personal assets.
I am planning to finance my property through a large bank and think an LLC would be more trouble at this point given potential challenges obtaining financing.
Am I being careless or exposing myself to any risks with this decision? My fear is that I take out $3m of coverage and get sued for $4m.
What level of coverage would you recommend on a $120k 2 unit property in the Midwest to sleep well at night?
Three million should be enough although incrementally, though another million is not that much more.
My own experience with LLC's and S Corps is the plaintiff sues you and the LLC anyway, particularly if you self manage. If you use a PM, and snow isn't shoveled, the PM gets sued along with your LLC if you use one. Under similar circumstances, they sue the LLC and you if you are responsible for snow removal. Basically the entity and it's management, i.e. you, gets sued.
Through the years, money I save on LLC's, I get more insurance.
@Adam Vo It's rare to see a claim exceed $1M, so $3M-$4M would be above average amount of coverage for a 2 family.
Unfortuantely, there is not an exact formula to use. It really comes down to your risk tolerance.
You usually get sued because of the insurance you have! But that being said, i do both. I have a few LLC's and more than enough insurance (each property plus umbrella). As to financing, if you find a lender that will lend to an LLC without personal guarantee let me know.
Thanks all. I think I am going to go with $500k liability and $1m umbrella coverage for now with no LLC.
With standard liability coverage on each property, umbrella coverage (2M) on all assets / activities and a very solid real estate management company, I have much more protection than I will ever need. The liability issue has been so totally blown out of proportion its become a bit ridiculous really. Folks putting in place multi tiered LLC structures to protect against the hordes of crazed invading barbarians lining up purportedly to sue them (in their most active and vivid imaginations / delusions). These folks have about as much likelihood of being the target of a serious million dollar suit as I have as being a target of an NBA recruiter.
But never let a little common sense get in the way of some exhilarating pretentious posturing.
If you get sued and the court issues a judgment for more than your net worth, declare bankruptcy to make the judgment go away. Get enough insurance to protect your net worth.