How do you protect yourself when buying <5 unit property?

8 Replies

For those that have purchased a rental property 2-4 units, how do you protect yourself from liability given that you cannot purchase the property with an LLC using a conventional loan? Do you use an umbrella insurance policy? Is there a way by which you can ultimately get your property into an LLC without violating the rules of the loan?

Thank you,


Umbrella with max liability coverage & it's usually cheaper than running & filing an LLC yr-yr.

Once they are paid off move them into the LLC, if you still think its a good idea, or just strip the equity.

I buy my duplexes in my LLC with a commercial loan of 25 years amortization and 5-7 year balloons. I've been averaging about 4.6% interest rates from a local bank. And then I simply get a landlord insurance policy to cover the dwelling, liability, etc.

Thank you both for the responses. 

@Pat L. So your thought is that a max umbrella insurance policy (based on agent's I've spoken to it sounds like $10M may be max for me) will cover any possible issue that arises at your rental property? Are there any particular areas you feel more exposed than if you had it in an LLC, besides if you are sued for over $10M?

I was under the impression you didn’t need and in fact couldn’t buy a larger umbrella than your total assists. You had to prove an “insurable need”(you couldn’t get a $100 million umbrella if you were only worth $2million) and that if you had $2million in assets and $2million umbrella and were sued for $4million they wouldn’t be able to collect the entire $4 Million

@Pat L.

So my questions is, if you were sued for $4million would the next million come out of your pocket?

My understanding is you have $3million umbrella and you’re worth $2million a $4 million lawsuit amount would be paid up to $3 million by policy, beyond that there’s no loss by you. 

If you have $3million umbrella and You’re worth $5 million get sued for $4million you’re going to pay that extra million. 

Hence you want umbrella over your net worth, but going way over doesn’t help. 

@Bill Brandt My understanding is that you would get an umbrella policy for however much you may be liable - for example, If I'm worth $1M but I'm sued for $5M, without an umbrella policy I would be bankrupt.  But if I have a $5M umbrella policy, which is significantly more than my net worth, the insurance policy would pay the $5M and I would keep my entire $1M.  

Related to my first question in the thread, let me give you a scenario - I get a conventional loan, and in the loan the bank gives me permission to move the property into an LLC and if I do I am personally guaranteeing the loan. Now let's say something happens and I'm sued and they take all the assets in the LLC (property), does that mean I would have to pay the bank back the loan balance and the party that sued me would get the property free and clear? Or would they get the property, less the principal of the loan?