First investment property, needing asset protection

4 Replies

First time posting on here, thanks in advance for any help you can give.

I am about two months away from closing on my first investment property. It is going to be an owner occupied 4plex which we will be purchasing using an FHA 3.5% down loan.

Here is where I need help. I work in healthcare, and as a result it is unwise for me to have any assets under my name due to the risks of a malpractice claim being filed against me. How can I close the loan getting the benefits of the FHA loan, but with the asset protection of an LLC for the property?

Thanks again for your help.

@Shane Haas

Although not in the healthcare industry, I am in the same boat as you are. 

The problem with the househack is that it does not make sense to put it in the LLC. There are few ways to put in the LLC and treat the LLC as the owner and rent it out from your LLC, but that complicates taxes, more bookkeeping, and lender might not treat this owner-occupied. You can go overboard and use Trust and other asset vehicle, but that would be over do for the first investment property that is a house hack.

Based on my experience, the most efficient way to shield this is to have an insurance. As you already know the importance of malpractice insurance, you can get the personal liability insurance as a umbrella insurance. Your current broker can fill you in on that.  It is super cheap as well.

The umbrella insurance will require you to maintain a certain limit on your malpractice, home, and auto insurance before it kicks in. 

@Shane Haas

Ashish is correct, be sure to get adequate amount of liability insurance. When you buy your regular landlord's policy for your 4-plex it will come with dwelling coverage, which give you protection in case of fire or other property damage, as well as "Premises Liability". The liability part will cover you if there is any liability claim that arises related to the property. 

Now if your concern is to protect your assets in case of being sued at your line of work then malpractice insurance would be what you need. With only 3.5% down there will be very little equity in the property to make the LLC worth it. Once your net worth grows it might be worth considering in the future, but for now in my opinion liability insurance + umbrella policy should be sufficient.

With a loan with 3.5% down, the mortgage itself would act as a deterrent, as there isn't much equity in the property to collect. You still need insurance and umbrella insurance, so what @Ashish Acharya and @Dmitriy Fomichenko is valid, but 1. insurance doesn't cover you in all scenarios and limits and 2. is not doing anything for you in case of an "external" attack (as with the case of a malpractice lawsuit).

You might be able to get the FHA loan and then transfer the property (with a warranty deed!) to a land trust for estate planning purpose (which should not trigger the DOS clause, and even if so, you can transfer it back in your name if the lender gives you grief) with the beneficiary an LLC, thus getting protection from "internal" and "external" problems. Talk with a specialist - @Scott Smith and get his opinion. 

Are you going to self-manage?

Thanks everyone for the insight, it is very helpful. We are planning on self managing while we love there and then decide from there if we want to keep managing. That diagram made me realize I need to sit down with a real estate attorney... Thanks!

Shane