LLC'S vs Millions dollar umbrella insurance policy for rentals?

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LLC'S vs Millions dollar umbrella insurance policy for rentals?

Guillaume Derouet

Investor · Ann Arbor, MI · Member since 2014 · 65 posts · 3 votes

Hi Guys, what is the best for liability insurance when you own rentals properties?

Is it to have each property under an LLC or having a 1 or 2 million dollars umbrella liability ?

Please let me know your thoughts, i would appreciate.

Merci.

Guillaume

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Steven Hamilton IIPro Member

Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes

10y

Originally posted by @Steve S.:

LLC gives you tax advantages if you set it up correctly and have a great CPA ... then your umbrella policy is tax deductible to the LLC as a business expense, along with your mileage, bills, your triple whip soy latte and many other things. Oh write-offs ... how we love thee

@Guillaume Derouet

Wrong. The LLC does not give you any more in deductions than you already could. As long as you are treating it as a business. That said do not give incorrect advice to people, I have to correct mistakes like yours far too regularly. The only additional item would be your LLC fees.

[email protected]224-381-2660

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Sean Kuhn
Minooka, IL · Member since 2013 · 353 posts · 85 votes
10y
Opening an LLC for each property or putting each property in an LLC is such a headache. Get a 1 or 2 million dollar policy and you'll be fine. That's pretty cheap.
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Nicole A.Pro Member
Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes
10y
It's your preference, but if you open a LLC, there is no need to have a separate LLC for each property.
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Ryan Billingsley
Investor/Realtor · Wentzville, MO · Member since 2014 · 846 posts · 431 votes
10y
@Guillaume Derouet
Why not use 1 LLC and a umbrella policy. This will separate your investment properties from your personal assets.
2 Reply
Steve S.
Lender · Los Angeles, CA · Member since 2015 · 800 posts · 229 votes
10y
LLC gives you tax advantages if you set it up correctly and have a great CPA ... then your umbrella policy is tax deductible to the LLC as a business expense, along with your mileage, bills, your triple whip soy latte and many other things. Oh write-offs ... how we love thee
@Guillaume Derouet
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Jeff Rabinowitz
Investor/Landlord · Farmington Hills, MI · Member since 2011 · 1k+ posts · 1k+ votes
10y
Bonjour, Guillaume. This topic comes up frequently. Search the forums and you will find hundreds of threads. There is a definite difference of opinion on this topic.

LLCs often offer a false sense of security. Most investors do not manage them properly and they are easily pierced. The more complicated your structure, the more likely you will make a mistake (pay a bill out of the wrong account). They offer little protection if someone is injured due to negligence or criminal actions. Many courts do not allow you to bring suit personally if your property is in an LLC--they require you to hire a lawyer. That adds a layer of expense and can delay simple actions like evictions or garnishments which are easy to handle personally. (Enroll in a pre-paid legal plan and you can have inexpensive access to lawyers to guide you through these simple actions.) Get an LLC if you'd like but an umbrella policy probably offers more protection. (You can still add an umbrella policy if you choose to use LLCs.)

Is 2 million enough? Depends on your portfolio. Talk to a a couple lawyers. (I am not a lawyer and am not offering legal advice.) Most of those I spoke to encouraged me not to bother with the LLC for my rentals. I do use them for other activities. (They can save considerable expenses when buying or selling properties.)
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David Dachtera
Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
10y
Originally posted by @Ryan Billingsley:

@Guillaume Derouet
Why not use 1 LLC and a umbrella policy. This will separate your investment properties from your personal assets.
Better run that past an appropriate attorney.
If your "corporate veil" is not properly set up or maintained, the LLC may not afford you and your personal possessions much protection.
You might do better to have a trust of some kind between you and the rest of the entity structure. That way, even if the LLC is "pierced", the trust still affords you another layer of protection. Again, seek appropriate legal advice which I am not qualified to give.
If you look on paper like you're worth going after, I'm not sure an umbrella policy will help that much. A litigious predator might consider that just "icing on the cake" after they clean you out.
Control everything, own nothing.
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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
10y
I just have a $2 million umbrella policy. It costs me about $400 a year or something like that.
Many of the things landlords get sued for, the LLC will not protect you from anyways. Fair housing violation, negligence etc....that LLC is not providing you any protection from those things...though your umbrella policy may not either.
[email protected]301-893-4635 Podcast Guest on Show #192
District Invest Group546 Reviews
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Nicole A.Pro Member
Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes
10y
Yes, anyone who thinks a LLC is meant to give you a free pass to break laws, ordinances, and such isn't the brightest crayon in the box to be frank about it. But yes, a LLC can indeed offer some separation from your personal assets and general protection. It obviously has benefits or why would it exist? But if you have little to no equity anyway on the properties you or your LLC owns, good luck to anyone looking for a quick pay day.
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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
10y
For me it depends on the asset type and asset value. I hold all of my commercial apt buildings in LLCs. Little houses I own personally with good insurance. I also have debt on these houses. I may shift when they are paid off. If I was investing with a partner, I would most certainly have an entity.
Without knowing what kind of properties you're buying or whether they will have mortgages on them or if you're buying with partners or not, it's hard to provide 'good' advice. One thing I wouldn't do would be to transfer out of my name into an entity after the fact. That can cause all kinds of problems. 'Sophisticated' isn't always the best way to go. Cheers!
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Cole SchlackPro Member
Realtor · Hawaii, HI · Member since 2015 · 145 posts · 95 votes
10y
An LLC provides no defense if you are sued, if you buy a Commercial package policy you get General Liability coverage and property coverage in 1 policy. Which gives you coverage for everything, unless it is excluded(read your policy exclusions), that you could be sued for plus insureds the building/contents for damage.
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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
10y
Originally posted by @Steve S.:

LLC gives you tax advantages if you set it up correctly and have a great CPA ... then your umbrella policy is tax deductible to the LLC as a business expense, along with your mileage, bills, your triple whip soy latte and many other things. Oh write-offs ... how we love thee
@Guillaume Derouet
Wrong. The LLC does not give you any more in deductions than you already could. As long as you are treating it as a business. That said do not give incorrect advice to people, I have to correct mistakes like yours far too regularly. The only additional item would be your LLC fees.
[email protected]224-381-2660
4 Reply
Jeff B.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
10y
@Steven Hamilton ll
No one here walks on water, and YOU get to be the kind, gentle mentor to help us all learn as we go. SMILE !
4 Reply
Nick Baird
IT Network Specialist · Lubbock, TX · Member since 2015 · 7 posts · 8 votes
10y
I am cautious about relying too heavily on an umbrella policy. Insurance companies make their money buy taking premiums and always looking for a way to not have to pay out. They did a really good podcast on this subject. It was show 109 with Scott Smith. I included the link for it below.
Podcast 109
1 Reply
Paul Choate
Attorney · Shawnee, OK · Member since 2013 · 350 posts · 230 votes
10y
He he he... these posts are becoming funny. I give up trying to educate people. If anyone follows most of the advice here, they got what they paid for.
1 Reply
Paul Choate
Attorney · Shawnee, OK · Member since 2013 · 350 posts · 230 votes
10y
https://www.biggerpockets.com/forums/51/topics/199...
0 Reply
Blake Williams
Poughkeepsie, NY · Member since 2015 · 17 posts · 3 votes
10y
I had the same question and after these responses I now know nothing new!
0 Reply
David Dachtera
Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
10y
Originally posted by @Blake Williams:

I had the same question and after these responses I now know nothing new!
Here's one way to look at the question...
Insurance is there to pay once you have a judgement against you. That means a court case has been brought and you lost. Insurance may or may not satisfy the plaintiff's demands or the judgement entered against you.
Business entity structures are there to prevent or lessen the impact of litigation should someone believe they have cause to sue and reduce the likelihood of that litigation being prosecuted successfully. You still may lose. However, if the entity is properly maintained the plaintiff('s attorney) should have considerable difficulty getting past the LLC's assets and attacking your personal property.
THAT is what business entity structures are for.
Remember this: Control everything, own nothing.
If you on paper like you have no assets to go after, attorneys will balk at trying to sue you personally. There may still be suit brought against your entity, of course.
2 Reply
Michael Boyer
Investor · Juneau, AK · Member since 2015 · 980 posts · 741 votes
10y
I can see some pros and cons on each.
LLC can be helpful. I think I may put my fourplex in one when I pay it off, but still retain my personal umbrella (I like em both I guess).
But right now it is not as problem free as one may think..... First the due on sale clause (which asset protections sites claim banks seldom opt to enforce, but might they change if interest rates rise?) You could trade one issue for another there..
And even some asset protection folks admit you will get angry letters from the lender and may have to revert back to your name anyway if they accelerate the debt (so back to square one).
Then as one blogger wisely asserts in an LLC, you also can't represent yourself in, say, a simple default case against a tenant. So save for legal fees if you are a pro se whiz small landlord. Just a factor for some...
Then you have to follow all the formalities or you could lose the protections of the LLC anyhow, as mentioned above. Do we all do it right all the time? Not so much... more piercing than a goth concert in the case law of some states (of the corporate veil). So think about how it fits your ability to follow the rules...
And perhaps the real 800 lb gorilla is legal fees in a lawsuit and the LLC has no duty to defend as mentioned above, so you want the landlord policy and umbrella there for that, so you can afford the legal fight in the first place, and legal fees eclipse the claims over and over these days (the phantom threat is legal fees perhaps as much as liabilities in my opinion, 10K slip and fall 100K legal fees)....
And you still may need the landlord policy for the claims related to issues like wrongful eviction, fair housing, etc so you have coverage there and defense costs covered as mentioned above... Then as wise landlords, we pencil it all out.. And my RLI umbrella, I think, was 300 bucks for a million, and you can go 3 million for around 500 bucks.. (allows up to 4-6 residential, I recall and a fourplex is one unit by definition) ..
So you could get a decade of coverage for maybe less than the legal fees for an LLC or trust arrangement (ie one to not trigger the due on sale).I have not priced legal fees lately.... But then again what are we protecting from... think realistically about the risks, too, as my driving has been far more risky than landlording on a small scale (hit twice by reckless drivers in 13 years but never sued for lanldording knock on wood, not even an injury double knock)..
Do you have 100 units or 1 unit, etc..The odds change. And are you worth 10 figures or 5 figures (what assets are we protecting in the first place)....I think each investor has to take all this into account and choose the best route....You can't eliminate risks but just mitigate it and there are quite a few ways to do that (especially best practices for risk management, so you could seldom, if ever, be found negligent in the first place, etc)... Short answer, neither is perfect, but I like them both....Great discussion.
2 Reply
Gulliver R.
Rental Property Investor · Seattle, WA · Member since 2016 · 524 posts · 148 votes
9y
I own a rental property and will be buying another one in a few weeks to also rent it out. Can someone recommend a good RE attorney to help me decide whether or not to go with an LLC and/or insurance? I have a lot of questions but it seems as though every time I ask them I always get told to talk to a lawyer and CPA. I appreciate it.
Thank you,
Gulliver
0 Reply
Gulliver R.
Rental Property Investor · Seattle, WA · Member since 2016 · 524 posts · 148 votes
9y
I live in Washington state (I don't know if that makes a difference)
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Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
9y
It's not really an either or question :)
1 Reply
Colleen F.Pro Member
Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
9y
From a money standpoint aside from legal fees there are a couple of other things to consider. Your state might have annual fees and filings associated with an LLC that increases the cost. However, an umbrella liability may not cost you $400 a year but much more. To get umbrella liability you need to have high auto liability coverage which could cost an extra couple thousand depending on who is driving. When you do the money calculations look at all these items. For personal liability we would have had to increase auto liability which would double the auto which is already sky high. Like to do it but the cost is crazy.
From a peace of mind standpoint you need to look at how you want your personal and business situations intertwined. What is going to make you sleep better at night?
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Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
9y
If you have an LLC with no insurance the courts can rule you don't have a legitimate LLC. Like @Ben Leybovich said it is not an either or situation. You need insurance whether you have an LLC or not.
Neither an LLC, insurance, trust, or complex entity structures are perfect asset protection. Each investor has to decide for themselves how many layers of protection you want vs the cost of those layers.
1 Reply
Kurt K.
Rental Property Investor · Phoenix AZ / Kendallville, IN · Member since 2016 · 293 posts · 149 votes
9y
I've accumulated 14 units this year and have started an LLC for all of the properties. I also transferred those deeds into the LLC name. In addition, I have a 1 mil umbrella insurance policy on top of my regular insurance policy. This can get complicated, but my LLC is also in my living trust. I had my lawyer help me set this up and I feel it was money well spent.
Yes I can be sued, but it will help me protect my assets.
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Erik Bell
Investor · Seattle, WA · Member since 2016 · 2 posts · 1 vote
9y
Gulliver, I also live in Seattle and recently worked with Elizabeth Carney at http://westseattlelaw.com/who-we-are.shtml in the process of purchasing a property. I was very happy with her.
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