Should I be concerned of Lawsuit from tenant - Rental Property?

Question

I have one rental property and just bought another house (new construction) near me for my second Rental Property. I know I should have one LLC per rental and that is my plan (have one SMLLC now), but laws here in FL regarding Single-member LLC's are not favorable for Creditor Protection. People are saying that a Multi-member LLC is better for Protection but would be considered a "Partnership" by the IRS and involves more complex tax preparation (Form 1065, Schedule L and Schedule K, etc) - far easier doing the simple "pass-through" to my personal taxes.

So question for those who own Rental Property (2 or more houses) - are you concerned about a tenant suing you for whatever reason? Is there any real reason to be concerned or is this just a ploy by lawyers trying to get you in their office?

Is tenants suing their landlord a big thing today or is this a minimal threat? Is it worth the headache and tax filing for a Partnership for added protection ... especially here in Florida?

Any input, feedback or advice would be appreciated.

Mike McCarthy · Answer

@John Jacobs for me, with only a couple rentals, I buy under my own name, get good mortgages, and keep them in good repair.

And if that doesn’t work, I have landlord policies on each and umbrella insurance over all of them (and my personal home and car). I sleep well at night knowing that the insurance will cover just about anything that may arise.

I have doubts, as a small landlord, that an LLC would really protect me much anyway. Once you get bigger with more properties, employees, etc - then that’s a different animal.

Scott Smith · Answer

Hey John,

Let me throw my two cents in on the matter. When I start working with a new client I often break down (1) what their personal assets include, (2) measure current investments and (3) ask into future investing/personal goals. If you face limited personal exposure and only own a small rental, people don't much incentive to sue you. If you have money, a house that is paid off and a few investments... that's a different matter. Good attorney's have options for cases they can take on, so they will aim for the low bearing fruit (people with minimal/no) protection and lots to risk. Attorneys work to make money just like any business person.

I often break things down into the "four pillars" of protecting your assets. The first pillar is a good insurance policy as that cover the majority of your exposure. However, it only protects you from one type of liability: accidents.

After that you want to compartmentalize your assets, which is often accomplished through the use of LLCs or corporations. I personally find the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely - check out this article to learn more. The third pillar is somewhat similar - you want to separate your operations from your assets. That means you establish a Traditional LLC to carry out the operations of your investments, in order to separate the liability from your assets, including: paying property management, paying contractors, collecting rent, marketing, etc. Finally, with the use of Trusts while establishing these structures you can add a level of anonymity by removing your name from public record.

I can't give you the "ultimate" answer for your questions, as the answer is different for each investor. Some people have a very low tolerance for risk while others have a much higher tolerance. But I believe the important thing is to understand what you are risking - and understand what the real risk of lawsuit is. Most lawsuits are initiated by miscommunication, not by anything intentional or from bad landlords (though they get sucked into lawsuits at higher rates, too.) The risk isn't that high when you are starting, but as your investments grow, so does your exposure/liability.

John Thedford · Answer

Get a good liability policy. That is your best protection.

Alvin Sylvain · Answer

I think you can also require the tenants to carry their own renters insurance. Some things that happen are unavoidable, or your fault, and your insurance should cover it. Some things are the tenant's fault, and it should be covered by their own insurance.

Of course, that won't protect you from tenant lawsuits, but it may remove certain motivations. For example, if they leave the bathtub running and the water ruins their record collection, their insurance ought to cover that. Without that insurance, they may decide to go after "Mr. Deep Pockets Landlord" and hope to get a settlement in lieu of going to court.

Grant Rothenburger · Answer

@John Jacobs People will have good advice on here for sure. Ultimately, you should find a good RE lawyer that comes highly recommended from other investors in the area. They SHOULD help you set up the best entities and structures for your business.

Justin R. · Answer

@John Jacobs

1. Have appropriate insurance coverage

2. Obtain umbrella policy

3. Consult with an attorney about asset protection, and anonymity

4. Always do the right thing in regard to Tennant safety

Best of luck!

Randy Janoe · Answer

I read an interesting paper with a LOT of statistics regarding the success rate of peircing veils of LLCs.  The paper also delineates the difference between contractual and tort based lawsuits.

I was surprised how frequently there was success.

https://papers.ssrn.com/sol3/papers.cfm?abstract_i...

John Thedford · Answer

Contact your insurance agent. They can guide you.

John Jacobs · Answer

Hey Mike, Looks like we are gonna do the same; keep up both rental houses (both are new anyway), hold title as "Tenancy by the Entireties" (best for married couples in FL), obtain quality landlord/dwelling policies on them and get a good Umbrella Policy to cover both plus primary property.

Our local RE Lawyer suggests the same. He also mentioned his clients - who are a married couple w/ several homes in my area also uses this structure for Credit Protection and safety. Apparently, he says ... "there is not much that could go wrong and have a Million $$$ lawsuit for a Single Family house on a lot". A landlord policy w/ $300K liability coverage should be fine - add to that a $2M Umbrella Policy ... and we should be good to go!

Should I be concerned of Lawsuit from tenant - Rental Property?

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