LLC vs. Umbrella - Specific Scenario - Need help

5 Replies

I know this topic has been hammered, but still cant decide whats best. Looking for feedback on a real world example. 

-Singled Family Rental Property

-Rented to College Students Sept-May, and on a weekly basis in the Summer

-House is valued at $600,000. House is paid off, no Mortgage.

It seems going the LLC route, even with a umbrella policy on top of that, leaves me extremely exposed based on the equity in the home.

Would it not be better to have no LLC and take out a very large umbrella policy ($3M-$5M)?

Peace of mind, protecting my equity and personal assets is paramount. I'm less concered about paying a premium for policy, the house generates substantial yearly revenue. The cost of a $3M umbrella policy is the same as the yearly LLC filing fee in my state, but again, cost of protection is not my main concern.

What would you do in this situation?

Thanks!

You already own the house, you could go either way, there is no mortgage, so there would be no due on sale clause to worry about. you will get mixed answers here on BP that may or may not help you, this has been an ongoing topic. there are Investors here that say all you need is the Umbrella policy because the coverage would be enough to cover most law suits, and others that say an llc because it separates you personally from the property and it helps prevent anyone from going after your personal residence. If you do not plan on using the equity in the house to further your investing then maybe look into putting it into a self direct IRA , family trust or other retirement vehicle to keep it out of a lawyers reach.

Hey @Michael Sheibar is it just me or is your exposure pretty much the same 600k whether your own it in an LLC or as an individual? The big thing to keep in mind is the type of policy you are going to need to buy to be properly covered. How you title the ownership will effect the price of the policy and maybe your annual expenses with LLC filing fees but in the end the asset doesn't change nor the exposure you have.

Since you are renting this out to students and then as a short term rental you will probably need to purchase a commercial policy to be properly covered or even change your policy throughout the year as you change the type of risk living in the property. Since you ae most likely getting a commercial policy I would set up the LLC and the discount for being an LLC will be a wash with your state filing fees. You can get an umbrella policy no matter how you title the property.

@Kevin Hoag - In this scenario below, doesnt umbrella (with no LLC), insulate me better?

$1.5MM settlement fir injury on property

With LLC, after my homeoners $500k is exhausted, im on the hook for additional $1MM, and the $600k in equity is cleared out right, right?

If only umbrella, and no LLC, isnt the equity in the home protected since the umbrella is large enough to handle it and more?

Thanks!

@Michael Sheibar Lets first start with the type of policy you are purchasing. While it is being rented out for a week at a time you will be able to use a short term rental policy which is a "residential" type policy. Depending on who your personal carrier is you could potentially get this policy through them and then a 3-5mil "residential" umbrella would cover your autos, home, camper, boat, atv and your "residential" rental properties up to a certain number. For rentals most carriers will still extend umbrella coverage even if you have them titled in an LLC.

When it comes to umbrella pricing the carrier wants to see that you first maxed out the liability on the individual asset policy. This will help with the umbrellas pricings as the chance of using it is now much lower.  

Now one item I cannot speak on is the student housing policy my carriers do now offer it and I almost never run into it so I have little to no experience with that coverage. I can tell you all my carriers will say no, unless the student is in a graduate program.

Now back to normal long term or short term non student rentals. If you own several properties and decide to buy a "commercial" insurance package you have now changed the game and the type of umbrella you will need to buy. The houses can be titled in either you personal name or your LLC but because you went to a "commercial" policy your umbrella coverage will also have to be a "commercial" policy.

You will be able to buy a supporting umbrella policy no matter what policy you have and no matter how you have it titled. Insurance carriers love to sell umbrellas and will never not offer it no matter the industry, the policy, the risk, the asset, I mean hell insurance companies take out policies on each other now to mitigate major storm losses.

The LLC separates and isolates your assets, so unless you have significant other assets you are worried about then the LLC won't accomplish anything in terms of protecting the equity in the property. The umbrella will protect your equity in the property and (assuming it's a good policy) pay to defend you as well, which an LLC won't. Of course, it you lose a judgment for more than the policy, everything you own is on the table unless it is separated by different legal entities. Additionally, you will be at the mercy of the insurance company in terms of how the lawsuit will be handled and there is a possibility you may not be covered.

The first thing I would do is leverage the property as much as possible and invest that money in a separate legal entity to make it a much less enticing target. If you have other assets you want to protect then you should get both an LLC for the property and an umbrella. After all, they are not interchangeable, they protect you in different ways. Do you not wear a seat belt because you have car insurance? Of course not.

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