Protection against Tenant Lawsuits

15 Replies

I have 5 rentals. All paid-off. They total upto $1.5 million of rental assets.

How do I do asset protection against any lawsuits, especially in a tenant-friendly state like California.

Actions Taken:

- I have broken them down to 2 LLCs (3 properties in one LLC, and 2 in another).

- I have Umbrella policy of $2 million.

Ideally, I'd like to have 1 LLC per property but California LLC are one of the most expensive in the country.

Can really use your help and inputs!

Thanks, Dave

I would not be in the least bit concerned but if you are you should pull out all the equity from the properties.

Invest it in a REIT or income fund and it should easily will double the return it is presently earning.

Problem is I'm being told that Umbrella policies have loop-holes and even LLC protection can be broken. So, it's not going to be 'all-encompassing'.

I did get a HELOC approved on one of the properties but have not used it (since the Northern California market is too hot to buy any more real estate).

The best method of protecting yourself? Be honest, document everything, and treat your tenants fairly.

I know many Landlords with decades of experience and they've never been taken to court once. If you are that scared of a lawsuit, it's probably because you don't really know what you are doing, you are crooked, or this just isn't your bag.

@Dave Atwal it sounds like you've done all of the right things to protect your assets. The best thing to do is to speak with a lawyer that specializes in landlord/tenant relations and see if they have any additional suggestions

Thank you all for your prompt replies and your inputs. Much appreciated.

With the collective wisdom of Bigger Pocket experts, I was trying to determine if I was missing some asset protection strategy that is standard with landlords..

Thanks again!

@Dave Atwal Wow, 5 rental, 1.5mil, all paid off. Nice, but perilous. 

1. You still might have too much bunched up together in an LLC.

2. How/who is doing property management for your rentals? You might want to separate the asset holding (passive) from the operations (active) side.

3. You guys in CA are different kind of special, but I think you might have options with a Delaware trust - talk with @Scott Smith .

4. Read Every-Landlords-Property-Protection-Guide

5. Here is a diagram to help you further:

Thanks Costin for the pointer to the book (and the flow chart).

To answer you Q's: I manage my properties myself.

A couple of follow-on Q's: a) Can you elaborate on "you guys in CA are different kind of special"? And how do you propose to "separate out asset holding from operations side" ?

Thanks!

@Dave Atwal @Dennis M. I think Dave has plenty to worry about in terms of assets at risk. As for how big is the risk, I guess that subjective to each person. 

Here are other threads related to this question, so you can judge yourself on prevailing opinions: 

https://www.biggerpockets.com/forums/51/topics/551672-asset-protectiondoes-it-even-matter

https://www.biggerpockets.com/forums/48/topics/509923-when-has-an-llc-actually-saved-your-assets

https://www.biggerpockets.com/forums/51/topics/551672-asset-protectiondoes-it-even-matter?page=1

https://www.biggerpockets.com/forums/51/topics/607544-been-sued-please-share?page=1

To Dave's questions:

a) Can you elaborate on "you guys in CA are different kind of special"? CA requires $800 LLC annual fee, which makes it prohibitive to have multiple LLCs. And I think it's regardless of where the LLC is registered and/or doing business. And if I remember correctly, you are being charged income tax on rental from other state too. In short, CA is very business friendly, landlord friendly...not.

b) And how do you propose to "separate out asset holding from operations side" ? The main idea: you have the assets in holding entities that are not doing anything else, just holding the assets, and you have an operation entity that is doing all activities. This Operations LLC (Property Management LLC) is the one doing the property management, maintenance, leasing, hiring of contractors, payments, advertising, etc., is the public facing entity. The PM has limited funds for operations, and if sued, little to lose - you can close it and open another PM LLC.

Yes, in a lawsuit, you, the Holding entity and the PM LLC and all might be named, but if properly structured and maintained, a lawyer could easily take you and the Holding LLC out of the lawsuit on the premise that you were not involved. Ask @Scott Smith for details on this and how this operation is called.

Not sure I agree that separating the holding LLC from the operating LLC is going to make a hill of beans difference but it certainly can't hurt. The reality is the owner of the property ALWAYS gets named in a suit. Think about the split there for a second. Holding LLC is the owner and operating is the property manager. Legally the operating LLC is acting as the owners agent by making decisions on leasing, maintenance, repairs, etc. So when a lawsuit comes any lawyer goes after the owner because the owner is almost always responsible for the acts of it's agents and employees. There are some complex structures to mitigate that for sure where the owner might hold assets in a blind trust with no control but you are a one man show and that won't ever pass the smell test to a judge.

Asset protection is all about risk tolerance. So you do what you can do. Every property in it's own trust or even layers of trusts with ultimate beneficial interest owned by a multi-member LLC. Strip out the equity using HELOC's so no equity is available to entice a lawyer in the first place; get good insurance, and only if you are literally expert in property management should you be managing units yourself. That alone opens you up to tremendous liability.

Not to be-labor the point, but why is it that managing your own properties opens you up to tremendous liability?

I've changed 2 property managers in past 3 years and both treated the property as 'just a number' - so I decided to take it into my own hands and stay on top of repairs and tenant issues.

Thanks.

@Dave Atwal As a RE investor and PM myself, I would be interested to know what the PM companies did (or didn't do) to make you feel like just a number. I market to clients that I treat my clients assets like my assets, so I would love to know what to avoid so my clients never feel like a number.

@Jim Shonts @Dave Atwal - FYI, I started recently a thread exactly on this subject -what PM do or don't do - https://www.biggerpockets.com/forums/52/topics/609031-landlord-property-manager-bill-of-rights.