North Muskegon, MI · Member since 2021 · 18 posts · 6 votes
Hi All!
I am in the process of creating my first LLC with a lawyer. I am planning on buying my first property this summer through this LLC. It will be a single member LLC. I will have a separate bank account for the LLC and all expenses for the property, as well as income, will be through that bank account. My lawyer suggested having another LLC to act as the property management for the property, but I feel like that may be overkill just starting out.
One of my biggest questions is insurance for the property as well as the LLC. I know I will need liability and landlord insurance, but what about an umbrella policy? If I were to get an umbrella policy, would I get if for the LLC that owns the property, myself, or both?
I am going to run the LLC very strict, no co-mingling of funds, but still have fear that if one of my tenants were to ever bring a law suit against me I'd be named personally. I want to cover my assets as best as possible.
Any advice you may have regarding Michigan LLCs for rental properties would be greatly appreciated!
Wholesaler · FL · Member since 2018 · 180 posts · 52 votes
5y
Easy to get umbrella insurance in your personal name but under and LLC is tricky (not sure why) if you find a insurance company willing to do it message me as I would be interested.
Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
5y
People can sue you personally for anything they want. An LLC is expensive to set up and there are extra annual fees- filing and extra IRS taxes, extra court fees if things go wrong. Paying to set this up before you own anything seems overly cautious unless you happen to be rich and plan to cut corners. Own/buy/maintain property that meets all health and safety codes, get excellent contracts and agreements, vet your tenants (go check where they live, have a credit standard, and verify income), be a straight shooter, great hazard insurance, and require proof of renter insurance annually. There are other ways to cover yourself. Conventional lenders won't loan to a LLC so this means your interest rate and terms will be higher.
Wholesaler · FL · Member since 2018 · 180 posts · 52 votes
5y
Easy to get umbrella insurance in your personal name but under and LLC is tricky (not sure why) if you find a insurance company willing to do it message me as I would be interested.
North Muskegon, MI · Member since 2021 · 18 posts · 6 votes
5y
@Caroline Gerardo@Philip L. my first property will be <$100k, I feel like an umbrella policy may be overkill as long as they can only come after the LLC. Once my portfolio grows, might be worth it. Thoughts?
When shopping for insurance, I will still definitely ask about umbrella policy for the LLC and see if I get any takers.
Insurance Agent · Nationwide · Member since 2014 · 2k+ posts · 1k+ votes
5y
@George Glessner the insurance coverage is no different for an LLC than it would be for a personally owned property.
If you will be using a lender, make sure they will lend to the LLC. It's possible the lender will not accept an insurance policy in the name of the LLC, which will be the proper way to structure the insurance if the LLC is holding the deed.
Rental Property Investor · Houston · Member since 2016 · 23 posts · 17 votes
5y
Hey George, congrats on getting started!
Purchasing a residential property through an LLC is a nontypical transaction. Because the lenders are not able to package the loan and sell it on the secondary market with more typical mortgages. The loan type you're considering is harder to find and the rates will be higher than if you find conventional financing and put the property in your name.
An alternative is to purchase the property in your own name and then quit claim it over to the LLC. This is fairly common and you'll hear of a lot of investors doing this. The issue is that most (virtually all) lenders will have what's called a due on sale clause. This means if the title is transferred to a new person or entity the lender can technically call the loan due. I have yet to hear of an instance in which a lender called a loan due as a result of this behavior, but it would be possible. If we enter a stage of high or hyperinflation, for example, lenders might look through their books for low interest loans that they can enact this clause upon.
While it is true that you can be sued regardless, having an LLC does afford some level of legal protection according to most attorneys that I've spoken with. Mostly I've heard lawyers claim it becomes more of a pain to come after you and decreases the likelihood someone's going to try.
For myself it makes more sense to put the properties in my own name and have an umbrella policy in place. I'm not interested in paying high interest rates for nonconventional financing, and I'm not interested in having a due on sale clause hanging out there that could jeopardize my current financing and dramatically alter my calculations on a rental's profitability.
The idea of leasing the property to an LLC with a master leaseholder agreement and then having the LLC sublease the property to the tenant is an interesting idea that I have not considered.
North Muskegon, MI · Member since 2021 · 18 posts · 6 votes
5y
@Jason Bott@Matthew Williams I will not be using financing for the deal. However, I am considering using the BRRRR strategy, which would require me to obtain financing through the LLC down the road.
Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes
5y
Maybe things are different in other states but in the DC and Maryland area, no one hires and lawyer to set up most forms of LLCs. Some do them online and others just go down the the municipality. Also, having one is not complicated in any way for me. I buy properties all the time under mine. I get financing all the time under mine. I do fix and flips routinely under mine.
As far as the umbrella policy, it would be taken out by the LLC having the liability.... If you just use the one LLC, it would be that LLC and the policy would provide additional liabiilty "over and above" any declared existing/base policies. That's how it works...
Yes, a management LLC is one way to go. But again, you need to have enough assets to justify the expense. The mgt LLC becomes the landlord so lawsuits should be directed at it. Now, the lawsuits can only go after the lease income. Worse comes to worse, I think the idea is you just abandon that LLC, and start a new one with new leases with your tenants and the suitor goes after what is left in that LLC. Meanwhile, you have other LLC's holding Title to the property and these basically become "dormant" since there are no funds going in or out of it.. Its preference / circumstance whether you go 1 llC per Title or lump a bunch in. Many investors seem to use $1mil (in property value when purchased) as a benchmark for how much a LLC holds.
While you have already decided to use a LLC, remember that the legal entity doesn't provide any tax benefit unless you are investing with a non-spousal partner. But, you've said its just you. A regular single member LLC doesn't affect your tax either. You might want to read this post on LLC's misconceptions:
Of course, consult a qualified professional or two, which you have. they do generally want to sell you a LLC. Most/many investors, include on BP, don't use LLC's for rentals. Many have posted as having 10's, 20's, even over 50 single family rentals. One line of thought is the landlord insurance policy and umbrella policy are enough since the insurance companies want to make money. If the insurance wasn't sufficient, then they'd lose their shirts too. But, its up to you how you want to proceed. Here is one prior post on umbrella policies:
You said you might need financing. Legal entities, such as LLC's, are not eligible for conforming residential loans. So, you'll need commercial financing. Many people talk/work with the standard, residential lender who only knows how to do residential loans. That comes to the quit claim deeding of the property back and forth between yourself and the LLC. My layman's advice is not to do that since it screws with your corporate veil. To my knolwedge, they don't have an interest in protecting your corporate veil which is a legal issue. Its just the only way for them to sell you a loan that they know how. Also, the Due on Sale Clause has been waived on Fannie Mae and I think Freddie Mac loans recently. But, its the least of your problems as if the loan is called in, you should just refinance. If you can't, perhaps you shouldn't be investing is my mindset. The bigger issue is piercing your corporate veil which was the whole point of getting the LLC. Here is is just one of my posts where I go into greater detail on my logic:
As far as getting commercial loan, you'll have to personally guarantee the loan anyway. Here is a prior discussion for your information that might be of interest to you:
Again, it depends on your circumstances. You seem to be aware to no co-mingle your funds. You need to make sure bills are paid out of the correct LLC, and funds moved around properly. You can't follow the "average person's" concept of claiming deductions. In my opinion, people seem to not understand that what an accountant figures he can deduct to save you taxes isn't the same as how a lawyer will look at it in terms of piercing your corporate veil.
Furthermore, yes there are investors, on BP as well, who use LLC's extensively/only.
Lastly, back to your originial question, probably the base landlord policy is enough. You need some sort of insurance so that you can afford the legal fees. I don't think they like it when I say this, but you want hte insurance company to fight the lawsuit since they don't want to pay out and you don't want to go broke to defending your LLC. It sounds like you intent to buy in cash, so there is more of a justification for the LLC/umbrella policy. However, if you are leveraging, I wonder if its really necessary. If your property is say $100k (i know you said <$100k which I get being you are in MI) and lets say you wind up getting a $80k loan. So, you have all this "overhead stuff" to protect $20k of equity... If I check an amortization table, it might be $25k in five years... In my layman's understanding, a suitor won't be able to get "ahead" of the first position lien holder. The point is the more your properties are leveraged, the less you have to actually protect.
North Muskegon, MI · Member since 2021 · 18 posts · 6 votes
5y
@David M. thanks for the thorough response! I think I am going to hold off on umbrella policy until I acquire a few homes in the LLC. I am going to set a limit to amount of assets I want in one, and once I hit that I may form another LLC depending on how this one goes, or just start putting them in my personal name. I will be extremely diligent with my bookkeeping and I like the security the LLC gives if ran properly. I am well aware there are no added tax benefits for a single member LLC, which I am completely fine with.
Londonderry, NH · Member since 2017 · 9 posts · 0 votes
5y
@George Glessner
Hi George,
I own a 3 unit building (my first investment property). As I understand it, the primary benefit of the LLC is the lawsuit coverage, separating yourself from the assets in question.
Speaking for myself- my insurance policy has liability coverage for me, up to $1Million if I were sued for injury on my property.
My lease documents state that I cannot be sued for injury on my property unless it can be proven the injury is due to direct landlord/owner negligence.
There are different ways to mitigate risk in this arena. Once I own more property I will absolutely get umbrella coverage (as well as continue $1million coverage on each property).
Londonderry, NH · Member since 2017 · 9 posts · 0 votes
5y
@George Glessner
My building is current self owned, no LLC. And I do not currently have an umbrella policy for it because my building insurance (liability insurance) / lease specifications on lawsuits are pretty air tight (so it seems).
I would only consider doing an umbrella policy once I have more doors
Not sure how it works in your state, but that sounds about right anyway... You can't make a contract clause that goes against law, and general advice is alwaysthe insurance and keeping your property in good repair. If you keep up with your property, then you limit the risk of somebody getting injured, etc. and then it should be impossible/unlikely for a suitor to prove negligence.
"building insurance" and liability are two different coverages, normally. That's nice, I think, that you can get $1M in liability coverage on a property. Maybe because I'm in NJ, but the policies aren't written like that here... Good luck.
Londonderry, NH · Member since 2017 · 9 posts · 0 votes
5y
@David M.
Correct! My insurance policy has both building & personal liability
1. Dwelling 2. Other structures 3. Personal property (owner occupied policy) 4. Loss of Use 5. Personal liability (each occurrence) 6. Medical Payments to others- each person
Seems to be a very inclusive policy that offers peace of mind to me as the owner
Londonderry, NH · Member since 2017 · 9 posts · 0 votes
5y
@David M.
All items 1-6 have their own individual (itemized) insurance coverages specific to my building and market. Item 6 alone, personal liability (each occurrence) is for $1Million.
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
5y
@George Glessner I have a personal umbrella policy that covers me, my personal residence, my automobiles and my rentals. However, the rental properties are all in my personal name and insured through the same company. If I put the properties in an LLC, the umbrella would not longer cover them or me personally with regards to that property. Each property / LLC would need it's own policy for liability. Talk to an insurance agent, but you likely need to carry insurance just on the property. I don't think your personal insurance will cover it in any way. That being said, the point of an LLC is separation.
There is another discussion thread on the forums right now where someone is saying their insurance claim was denied, because it was a personal policy claim on a property held in an LLC and leased through the LLC. It is a different situation than yours where they likely financed it in their own name and transferred it to an LLC. Work with your attorney and insurance agent to make sure your lease, insurance and ownership all match property to avoid problems.
North Muskegon, MI · Member since 2021 · 18 posts · 6 votes
5y
@Joe Splitrock thanks for the reply! I know I would need the liability insurance in the LLC name since it will own the property, I just didn't know if when people say umbrella policy if that is for me personally or the LLC, but I now know I would need to get the umbrella for the LLC to cover the rental.
@Joe Splitrock thanks for the reply! I know I would need the liability insurance in the LLC name since it will own the property, I just didn't know if when people say umbrella policy if that is for me personally or the LLC, but I now know I would need to get the umbrella for the LLC to cover the rental.
Umbrella policy is a layer on top of other policies. In your case you would likely just get higher liability limits on that specific property. I doubt if you got a personal liability policy that it would cover the rental in the LLC. You should be covered by the LLC policy when acting in capacity of the LLC, but check with your agent how that is setup. I am not sure you need to be named specifically, or just covered as an agent of the LLC. Before you get any insurance, ask specifically what and who it covers. I would also read the policy (as boring as that is) because there are often exclusions that you need to be aware of when leasing.