LLC or Blanket Insurance Policy?

Question

Thomas S. · Answer

The real estate investment field is split about 50/50 on the need or real benefit of a LLC. Insurance is obviously of prime importance. That is a obvious decision.

The necessity of having a LLC is questionable as no investors having a LLC have ever posted first hand experience of being protected by one. That would either be due to none having required the protection or the LLC failed to protect and they are no longer on PB.

My guess is that in the real world a LLC is more for psychological protection. Unfortunately it does encumber investing and you will still likely need to provide a personal guarantee to banks.

Ali Boone · Answer

Here's info on putting rentals into an LLC (or, at least why I didn't use one for mine), but more than the article, read through the comments as there is a lot of additional info in there-

https://www.biggerpockets.com/renewsblog/2013/08/1...

Especially because you are talking about one low-priced property, I can't imagine the LLC would make sense. Expensive, limiting, and doesn't provide full protection anyway.

Jonathan Twombly · Answer

@Megan Shebeck

Insurance and LLCs do different things.  Insurance pays for out-of-pocket expenses caused by damage to the property or liability on the property, up to the policy limits.  An LLC is a stop-loss vehicle that limits your liability to your investment in the asset.

If you have a $1,000,000 insurance policy and someone wins a $2,000,000 judgment, they will take the property and then come after you for the remaining $1,000,000, unless the property is owned by an LLC, in which case they cannot pursue the matter further (unless you have disregarded the corporate separateness of the LLC by commingling personal assets with the LLC assets.  So don't succumb to to the temptation of what many people advise, which is to run all sorts of personal expenses through the LLC to save on taxes.  This is what gets people into trouble.)

Just because you currently don't have major assets other than the investment property itself doesn't mean that you should not have an LLC.  In many jurisdictions, judgment creditors have up to 10 years to collect from you. So, without an LLC, they can garnish your future earnings until the judgment is satisfied or ten years have passed.

Also, don't put multiple properties under a single LLC (unless it's an umbrella LLC over several property-level LLCs) because a creditor can reach any asset under the LLC if they have a claim against any other asset under the LLC. Be sure to put each asset into it's own LLC.

If most of your wealth is tied up in properties, it is pointless to have them under one LLC, where they are not protected from each other, while your scant personal assets are protected.  But, if you are accumulating lots of real estate, your personal assets are also going expand, so you need to protect them, too.

Jaysen Medhurst · Answer

Hi Megan,

Most lenders want a personal guarantee, regardless of LLC. That means you are personally on the hook for the mortgage, even if the LLC technically owns the property. After several years of track record that may change--depends on the lender and other conditions.

What are the other numbers on the property? ARV? Expected cash-flow, etc.? If it will be worth $200k after reno, you can refinance and pull most/all of your money out.

Lastly, an LLC isn't insurance and insurance isn't a LLC. If this is your 1st property, don't get hung up on the LLC. If you don't have any other assets, what are you trying to protect?

Jason Bott · Answer

@Megan Shebeck one is not better than the other, but rather to have both of them work together to best protect your investment.

Most investors who will be financing in their personal name will just buy higher liability limits with an Umbrella policy.

Start with $1M General Liability and buy and additional $1M-$5M umbrella coverage until you feel comfortable.

If this is a single family rental, $1M is what most investors will carry.

Dennis Moynihan · Answer

Insurance is more important than an LLC to get your deal done. No bank or lender will close on the loan without proof of Property & Liability insurnace. An LLC is not required to get the deal done as I'm assuming the debt you are getting is not non-recourse anyways. Please feel free to DM me with any questions. Best of luck!

LLC or Blanket Insurance Policy?

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