Asset protection from tenants while house hacking

7 Replies

I have read through the forums, consulted my real estate attorney and insurance agent and have come to a dead end so I figured I'd start a discussion on here. 

My wife and I just bought a duplex and will soon be signing a new lease with our newly screened and qualified tenants. The home was purchased through a VA loan and is my primary residence. Therefore the property is in my personal name and not an LLC. We are self-managing the property so we considered forming an LLC for our property management "company". However, as I suspected, my real estate attorney informed me that because the home is in my personal name that the property management LLC would provide little to no protection for a tenant suing. So we turned away from the LLC route. I did some research and my real estate attorney confirmed that I should look into an umbrella insurance policy. So I contacted my insurance agent and asked how much coverage I currently had against a tenant suing me (none apparently) and how much coverage I could get. My insurance agent said, "I am not really sure that we have anything to insure against lawsuits - you do not have LANDLORD liability on this because it is in your personal name and is treated as the primary residence - therefore a personal lines policy not commercial."

My questions are:

1. Do I really even need coverage against a tenant lawsuit?

I did a VA loan on the property with 0% down so I have about no equity in the property at the moment. I just don't want to lose my whole life savings that I have set aside right now for investing.

2. If I do need coverage, what do you recommend? A separate insurance policy? An umbrella insurance policy?

I understand the chances of being sued (especially with being responsible with the upkeep of the property and screening tenants properly) are quite low but it's certainly not unheard of. 

Any advice is appreciated.

Thanks,

Dom

Your homeowners policy includes liability (unless it’s some weird policy). If someone slips and falls on your steps, that’s what you have insurance for.

An umbrella policy increases those liability limits for your home and auto insurance up to $1M (or more). If you get into a car accident, someone slips, or somehow gets hurt on your property, your homeowners covers the first $200K or so... then umbrella up to $1M.

Definitely a good plan. Agreed than an LLC won't help much in your case.

Your best protection is:

1. Know and obey the laws;

2. Treat your tenants honestly and fairly.

You can get additional levels of protection with an umbrella insurance policy or an LLC or a Trust, but you don't have to panic about it or rush into it. Take the time to educate yourself and do it right.

Originally posted by @Dominic Franco :

I have read through the forums, consulted my real estate attorney and insurance agent and have come to a dead end so I figured I'd start a discussion on here. 

My wife and I just bought a duplex and will soon be signing a new lease with our newly screened and qualified tenants. The home was purchased through a VA loan and is my primary residence. Therefore the property is in my personal name and not an LLC. We are self-managing the property so we considered forming an LLC for our property management "company". However, as I suspected, my real estate attorney informed me that because the home is in my personal name that the property management LLC would provide little to no protection for a tenant suing. So we turned away from the LLC route. I did some research and my real estate attorney confirmed that I should look into an umbrella insurance policy. So I contacted my insurance agent and asked how much coverage I currently had against a tenant suing me (none apparently) and how much coverage I could get. My insurance agent said, "I am not really sure that we have anything to insure against lawsuits - you do not have LANDLORD liability on this because it is in your personal name and is treated as the primary residence - therefore a personal lines policy not commercial."

My questions are:

1. Do I really even need coverage against a tenant lawsuit?

I did a VA loan on the property with 0% down so I have about no equity in the property at the moment. I just don't want to lose my whole life savings that I have set aside right now for investing.

2. If I do need coverage, what do you recommend? A separate insurance policy? An umbrella insurance policy?

I understand the chances of being sued (especially with being responsible with the upkeep of the property and screening tenants properly) are quite low but it's certainly not unheard of. 

Any advice is appreciated.

Thanks,

Dom

 Being sued by tenants & loosing everything you own seems to be a common fear among new investors. It's way way way overblown. So long as you aren't acting with gross negligence you've really got nothing to worry about on the lawsuit front. I've been sued many many times the biggest things are security deposit disputes. Just pennies really, most of the time the cost to go to court one afternoon with your lawyer is more than the lawsuit in question. Just act in a responsible way & it's really no big thing to worry about.

Originally posted by @Nathan G. :

Your best protection is:

1. Know and obey the laws;

2. Treat your tenants honestly and fairly.

You can get additional levels of protection with an umbrella insurance policy or an LLC or a Trust, but you don't have to panic about it or rush into it. Take the time to educate yourself and do it right.

also lets look at logic and reality.. since you used a VA loan U have no equity so unless your sitting on a mound of cash or other real estate no one is going to sue you is the reality of the situation.. so look at your assets and see what they are and if its worth spending extra money to protect them.

@Justin M. @Dominic Franco  - Do you have other major assets to protect? Do you buy with a large down payment?

Make sure you have something to protect first before complicating your life with LLC creation and maintenance. The mortgage note itself (and the associated lack of substantial equity) is a form of protection. Then you need first proper insurance and umbrella insurance. And of course good property management. Read Every-Landlords-Property-Protection-Guide before deciding for more advanced asset protection structures.

With an LLC you'll likely have to get a commercial loan - meaning you'll loose one of the main advantages of house hacking, the very favorable financing options in personal name. There are ways to transfer property after, but you'll have to consult with a specialist like @Scott Smith .

Here are some graphical representations to help you in these decisions/discussions:

Asset Protection Onion DiagramAsset Protection Onion DiagramAsset Protection Decision DiagramAsset Protection Decision Diagram

Dominic
Most companies will insure owner occupied Mult-Family (1-4 family) homes under a Homeowners policy. The policy contains Liability Insurance and subject to the terms, conditions & exclusions, provide coverage for a tenant lawsuit.

I would recommend adding Personal Injury coverage (Libel, Slander, wrongful imprisonment, etc..) if you do not have it already.

You may also want to shop this to an independent agent who is more familiar with what is needed in your situation. Check with others in owner occ. multi-families to see who they use.

Lastly, let them know you also want Umbrella coverage and at what limits. Some smaller companies may only go up to $2,000,000 umbrella limits where most will go to $5,000,000 or more.