Pros and Cons of a LLC vs umbrella insurance for rental property

10 Replies

Hi everyone, I’m a newbie to Bigger Pockets and am excited to learn from and to know this community of knowledgeable RE investors! So I’m just dipping my toe in real estate investing and am about to make an offer on my first multi-family in Jersey City. The fundamentals of the place look good, and I plan to rent both units out (I live in my own apartment). I would like to set up an LLC to purchase this property but was told by my NJ lender that the loan would be considered a commercial loan, 30-year conventional isn’t an option, and the interest rate would be much higher. He recommended that I buy an umbrella policy instead. What are your thoughts on the pros and cons of buying with a LLC vs. buying individually with an umbrella policy? Any advice or tips appreciated, thanks y’all!

This has been posted a lot and would recommend looking back at other discussions on the topic. Love Umbrella policies and LLCs are useless for liability protection (unless you are abiding by all business rules). Check out "piercing the corporate veil" and you will quickly see why the Umbrella policy is preferred for small to medium size landlords.

Originally posted by @Colleen McCann :

This has been posted a lot and would recommend looking back at other discussions on the topic. Love Umbrella policies and LLCs are useless for liability protection (unless you are abiding by all business rules). Check out "piercing the corporate veil" and you will quickly see why the Umbrella policy is preferred for small to medium size landlords.

I'm a newbie investor, but all of my research thus far confirms what Colleen said. If you google "piercing the llc veil", you'll find several articles on the issue. The biggest challenge is likely maintaining the separate identities of the company and its owners/shareholders. I'm assuming most investors won't maintain this distinction and will instead commingle personal and business funds or misuse business assets as personal assets, rendering the LLC useless.

Thank you Neil and Colleen for your quick responses and advice! Apologies for my rookie mistake. I just tried Google and it does have a lot of good articles on this topic, next time I'll try there first

@Yu Chan you didn't make a mistake that is a legitimate question to ask here. If fact it has been asked many times and a search here should bring up a lot of information.

An LLC will not provide as much protection as people think. It will cost you money to run. you will need to follow appropriate formalities so it does not get "Pierced. It will cost you more to get financing with an LLC. All that said I will not own properties in my own name and I don't know and attorney that would either.

The question is NOT LLC vs insurance. Insurance is a MUST even if you have an LLC. A better question is; are the costs in time and money worth having an LLC? As already said for me and every attorney i know the answer is yes. But what is the right answer for you? If you area single member LLC and you don't want to take the time to learn the formalities of running an LLC the answer may be no.

I suggest you  check out NOLO Press website and books. They produce legal self help books. I am not suggesting you do this without legal help but you should have some idea of the basics so that you can better work with an attorney.

These post about LLC vs no LLC are always great. I have all my properties under my LLC. However, these assets really aren't mine bc they're leveraged. I often find myself asking what am I really protecting? Everything in my personal life is owned between my wife and I. So even if I were sued personally they can't touch my house or other assets. The blogs,post and podcast do a great job breaking down the pros and cons. What I've found in my 4 years of REI with an LLC is that my insurance cost are high, my loan terms are 5/1 commercial loans with balloon payment, I can't go to court without a lawyer, and each year the State gets their money for my entity. Is an LLC the right choice? I think this all goes back to personal preference and what your goals are. At this point in my REI career if I could go back 4 years I'd put all my properties in my personal name bc really what am I protecting? If I owned my rentals w/o a mortgage then absolutely I'd protect the asset under an LLC. I'd like to read others views on this topic.

There's a great podcast I recently listened to on the topic of protection of assets. There is a way to get the property out of your name and into an "anonymous trust." I'm going to be speaking with an attorney to see how I can make this happen once I close on my first property. I will also have insurance. I don't plan to start an LLC until later on when it makes more sense.

Here is a link to the podcast: http://rporeipodcast.libsyn.com/ep124-get-that-property-out-of-your-name-and-other-asset-protection-advice-from-scott-smith 

I own an insurance agency not far from Jersey City

As a building owner you MUST carry an umbrella. Habitation class in insurance has one of the highest loss ratios which basically means it has the most claims.

The biggest nuance we see is slip and fall and not even from one of your tenants, from someone walking by in the winter that slips on ice. We’ve seen these claims go 1MM + in damages.

The umbrella is the cheapest part. You building/general liability will be the more expensive part and the umbrella shouldn’t be more that $500-$600 a year for an additional 1MM in coverage.

Let me know if I can help the quoting process!