Being fully covered against Tenant Lawsuits / Rental Properties

5 Replies

Hello Everyone,

I owned 3 single family homes,I used to rent 2 of them and decided to sell all of them to have money to go into flipping,the reason I decided to do this and quoting rentals is that I am OVER (maybe not..) paranoid .. paranoid about being sued by a potential tenant and who knows maybe losing the assets or maybe worse who knows.. I used to be a very caring landlord,responsive and of course proposing a great house in Good condition,but for 2 years I was almost not sleeping at night thinking an accident/personal injury/mold related health issue could happen and consequence of this would be them suing me for eventual High medical bills or else,which could mean losing one or more of my single family homes as they were all under my personal name,

The point of my post is that it seems you cannot follow a "by the book equation" that would 100% prevent you from this to happen

Okay I had the biggest umbrella policy up to 5 Million in coverage,but I have a limited trust into insurance companies,I can easily imagine them finding a way to not cover the problem if needed with some clauses

I always was specially paranoid about MOLD,especially with the houses being in Florida,although the premises seemed to be totally ok at move in,you will always be told that there are some mold in houses in general,so the situation could quickly change without you noticing even with constant control,

I add a very nice old couple as tenants but at one point they were telling me they had health problems because AC was not working for a day in order to have it fixed quick(of course as usual I respond or act fast to resolve the issue but this just ringed to my mind what could happen if they would get very ill and need to pay a crazy medical bill...),it never went further than this but there is a millions reasons I wouldn't be aware that could eventually result in the property being the source of the health problems,or worse they could hire an attorney that could help put the responsibility on me,

Do you guys always change all the plumbing on your rentals houses?my houses are old 50's or 60's home,and could have cast iron pipes,who knowns people could get sick because of that and I doubt someone would cover this,the list of eventual issues seems endless to me..

My question is how can I sleep at night and take advantage of the great potential of rental investments?

In my opinion if I had to do it again I will separate each house into an llc with proper insurance for each llc (Although I have read that this can be pierced and is not that useful for protection)

But the insurance coverage is what scares me the most,

If I do it again I want to do it right,and by right I mean sleeping at night :)

(because I am the type of person looking after the tenant and the property but I know how people can become if confronted to a tough situation where they would have to pay medical bills they can't afford unfortunately..)

Your experience are and advices are greatly appreciated,

Thank you!

First with any investment there is risk. You can mitigate it. If you own a rental or two and can't sleep worrying about someone suing you then you might look elsewhere than any real estate investment.

That said you can add many layers of protection.

Individual LLC's for each property help by a master LLC held by a Trust etc to give you layers of protection.

Insurance is your first line of defence, an umbrella adds another.

Having properties mortgaged makes them uninviting to an attorney that may want to see if you have any assets worth taking.

You can consult a Estate planning attorney for guidance on different strategies.

If you are risk adverse you might want to look else where to invest your money.

Thanks for your comment John

"Having properties mortgaged makes them uninviting to an attorney that may want to see if you have any assets worth taking"

Also this is a very interesting..I was about to bring it up but I am glad you are doing it,my houses were paid in full!which stressed me even more

do you think that even if you have 90% down and just a bit of mortgage on it is enough to look unattractive to lawyer too?my idea would be mainly to use it as you are saying as a sort of dissuasion to lawyers or others without having to pay an interested rate on a too large sum(which I wouldn't want as I d rather have the most cashflow I can spend to live)

I know there are risks everywhere,I love real estate too,the only risks that scares me is the HUMAN in this case and those scenario..

Recession,tornados,fires etc etc I am fine with those

Hey Ron, 

I tend to agree with @John Underwood on this, no matter what there is a level of risk involved in this type of work. I believe the risks are very relevant and should be addressed, but in the end we are fragile people and can't protect ourselves from everything. Same thing goes for investments, you can place multiple layers of protection in front of you, but ultimately you are tied to the object. If it truly causes that much stress, than this may not be the ideal type of investing for you. 

However, there are strategies that mitigate your risk. So if you choose to move forward with investing this is how I often break it down for people into the five pillars of asset protection. The first pillar of asset protection is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments(maintain your property, etc) - these simple steps will help you prevent lawsuits before they even occur.

The second pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.

The third pillar applies after you have good insurance You need to protect yourself from what insurance doesn't cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property, people suing can't touch you or the other properties. You should use either LLC's (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend 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 for FREE. If you're interested in using an LLC, this article also further explains the advantages of a Series.

The fourth pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a "asset holding company") and a completely separate company handles all of your operations (this is a traditional LLC a/k/a "operating company") For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.

The fifth pillar is owning everything anonymously. If people don't know that you have assets, then they are less likely to sue because there's no use in suing people that qualify for food stamps. This anonymity can be accomplished for free by using land trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner though, it still doesn't matter because you would not be the owner. The land trust and the LLC are the owner of the asset/real estate, so even

Beyond the first five pillars there are many more strategies including equity stripping or even setting up overseas trusts. The asset protection strategy rabbit hole is pretty much endless, and in the end most investors just need to sit down with their attorney and find a strategy that allows them to work all day and come home at night feeling accomplished and able to sleep. Some pay a lot for that, others sleep like a baby without almost any protection in place.

I feel like this is something we can't answer for you on the forums, though. In the end you will just need to sit down and decide how much the income is worth to you. The only additional thought I might add is this: if you sell the houses and someone purchases them out as rentals and becomes the landlord, do you think they will care as much as you do?