3 Fundamental Tips for Protecting Yourself Legally as a Real Estate Investor

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When you’re a real estate investor, you’re at a lot of risk just as a part of doing business — any number of disasters can leave you holding onto a property that isn’t worth what you paid for it. The kinds of dangers that you face as a real estate investor require some very ordinary but easy to overlook kinds of protection.

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3 Fundamental Tips for Protecting Yourself Legally as a Real Estate Investor

Don’t Own the Property

The first step to being a successful real estate investor is making certain that any accidents that incur liability are pointed directly at not you. By creating a limited-liability corporation and putting the property in the corporation’s name, you can create a barrier between your personal funds and any liability that might arise from an accident on the property.

Related: Real Estate Insurance 101: How to Best Protect Your Investments

Those property owners who want to go above and beyond can also use other strategies to help obfuscate their ownership. They can be important if you’re concerned about someone looking up the property owner online and discovering that it’s you. These include tricks like putting your property in a land trust, filing under your spouse’s maiden name, and more.

Don’t Manage the Property

Similarly, if you’re directly connected to the management of the property, you’re liable for anything that goes wrong with the management process — and there’s a lot of things that can go wrong. Set up a (different!) LLC to manage under, or actually just take the logical step of hiring a professional outside property manager to handle the details while you watch the profit come in.

If you do decide to manage directly through an LLC, get intimately familiar with the law — because you will be seeing the inside of a courthouse. Few professions outside of a law office are more consistent about putting you in front of a judge than property management. Protecting yourself means either hiring someone who knows, or personally being deeply aware of:

  • Fair Housing Laws
  • Fair Credit Reporting Laws
  • Discrimination Laws (Both Federal and State)
  • Privacy of Information Laws
  • The Americans With Disabilities Act
  • Your State’s Landlord/Tenant Laws
  • Premises Liability Law

Make no mistake — many judges see it as a sacred duty to protect innocent tenants from abusive landlords, even when the tenant is clearly the one in the wrong. If you’re not adapting your business practices to the legal landscape you work in, you will end up on the wrong side of a lawsuit.

Insure Everything Generously

The name of the game when it comes to investing in real estate is risk avoidance. In the modern world, the single most effective tool for abrogating risk is insurance. You need to have several kinds of insurance in ample amounts, including:

  • A Dwelling Policy for each property. This is separate from a Homeowner’s Policy in that it doesn’t cover goods inside the property (which would presumably belong to the tenant) — just the structure itself.
  • A Vacant Property Policy for each property that you anticipate will be without a tenant for a month or more — available as a rider on the Homeowner’s Policy or as a standalone policy.
  • A Construction Policy for each property that is undergoing major repairs or renovations.
  • A Liability Policy for you. Yes, even though you’re owning via an LLC.

Related: Protect Yourself As a Landlord With These 6 Crucial Documents

In all of these cases, pay the extra for a policy that pays out for “replacement cost,” never “cash value.” Cash Value pays out what you could have gotten for selling the property on the open market after depreciation. Replacement Cost pays out what it takes you to rebuild the property, which is what you actually need.

In addition, if you’re doing the property management yourself, you’ll also need:

  • A Landlord’s Policy for each property.
  • An Errors and Omissions Policy for you. Again, even though you’re managing via an LLC.

All of this should be considered the minimum level of protection that a property investor should have between their funds and the properties they invest in. Anything less is asking for a disaster to leave you in an unrecoverable situation.

How have you protected yourself as an investor? What advice would you give a newbie investor just starting out?

Leave a comment below!

About Author

Drew Sygit

Drew is the manager of Royal Rose Property Management, a fairly high-tech solution for Detroit Metro area property owners & investors.

34 Comments

  1. Ayodeji Kuponiyi

    Great Post Drew! So far I have a duplex and I have a regular homeowner insurance since I live in one unit and rent the other out. i require my tenant to have a rental insurance before giving the keys. Once I move out should i change the insurance policy? Also when I have, say, 6 multifamily units, should I have them under an LLC or umberlla insurance to protect my assests?

    • Drew Sygit

      AYODEJI: We can’t give legal advice and it depends on the state you’re in and a multitude of other factors. We can advise you to speak with SEVERAL attorneys for their OPINIONS and to make a fully informed decision you’re comfortable with. Don’t assume attorneys know everything — as they don’t. Also find a good insurance agent that understands investment properties.

  2. This is really great info. I never realized how exposed a person can be in this type of real estate investing.
    Thanks for posting and being so thorough.
    I’ll download all this to my word and keep it handy!
    -Angel from Los Angeles.

  3. Eva Salas

    I own multi fam. I have biz umbrella ins for the apts in the LLC as well as personal umbrella, both high coverage in case the veil is pierced. Which is a possibility as my husband does most of the maintenance. No longer have low income tenants. Think they sue more…but not why I sold low inc building.

  4. Jeff Jenkins

    Be careful about LLC’s associated with single family properties. This is often a violation if you have a Fannie Mae backed loan. Sometimes the mortgage lender will find out and trigger the ” due on sale clause.” You don’t want that.

    Another issue is when an insurance claim is filed. The title is now in the LLC’s name, but the insurance is still in the individual’s. The insurance company does not have to fulfill a claim when the title is in another name.

    For SF I just recommend $300K in general liability for EACH property and a $1 million general liability umbrella policy over ALL of them. That’s all you need. Umbrella policies are super-cheap.

    Multi-family? Yes, you definitely want the LLC over each MF property.

    • Drew Sygit

      JEFF: good points. To clarify if you have a FNMA type loan on a 1-4 family property, putting the property into an LLC after you finance MAY be a violation of the Due on Sale Clause of the Mortgage instrument. We’ve never seen a FNMA bulletin on this and in our experience, only Flagstar seems to enforce it.

      To solve the insurance issue, have your LLC added as an Additionally Insured to the policy.
      ANother potential pitfall is your title insurance. Get it in WRITING that your title policy will not be voided if you transfer the property into an LLC. Most title underwriters will now keep coverage in place. but again, get it in writing.

  5. Jeffrey Hare

    Good points, Drew, but I quibble with your order. I advise my investor clients that the keys to common sense asset protection are Prevention, Plan and Protection, in that order. At the top is using best practices property management, not to avoid liability (which it doesn’t), but to prevent problems. The second step is to have a good insurance plan, not just for yourself as owner, but to insist that each tenant have a renters insurance policy. Third step is protection – isolation of material assets into properly formed and properly maintained entities such as a LLC. One commenter (Jeff) noted that improper transfer of ownership to a LLC could create serious problems with the lender. A more common problem is forming the LLC in the wrong state, or failing to pay the annual fees and taxes. Setup and maintenance of the entity is as important as the investment itself.

  6. John Thedford

    Good article. In Florida, single member LLC’s offer little protection for the personal assets of the member. Florida supreme court basically says that a single member LLC can be a disregarded entity. Whether you use a LLC, S corp, or some other form of ownership I believe it is far more important to be proactive in your management practices. Know your laws. Know your duties. It is far easier to prevent a problem than having to defend yourself if one arises.

  7. margaret smith on

    In Florida, all these insurances can really add up- we have flood (changing the flood maps to incl much more property even as we sit here), and hurricane(windstorm), as well as all the others that Drew mentions. Many of our properties are not insurable, due to age, location, etc- and so the state insures– but no longer includes any liability on the homeowners or landlord policies, so that is now separate- OY! Then come the rising real estate taxes, which cannot be capped unless you are the primary homesteader. With all of this, and adding in management fees? …Basically, better check to see if you still cashflow!

    • Drew Sygit

      MARGARET: in Michigan we don’t have to worry about hurricane insurance, and few properties have flood insurance. We do have crazy property tax statutes that burn a lot of newby and out of state investors. Thanks for adding this!

  8. Larry S.

    Good information Drew . All of my properties are listed as owned by a trust. Forming an LLC means paying thousands of dollars in transfer taxes for the new LLC name. This must be done. I really don’t want to do this and don’t know what addition advantage in protection it will give me. Therefore can all properties in a trust be put under an umbrella LLC and no transfer taxes paid.

    • Drew Sygit

      LARRY: trusts are similar to LLC’s in that the property is owner by another entity. We can’t comment beyond that as Trusts & LLC’s are controlled at the state level, so any answer would depend on your state. We can state that in Michigan, transferring a property you own to a single-member LLC you also own is typically a tax exempt transaction. Please check with an experienced attorney.

  9. BreAnn Stephenson

    Nice article Drew. As an insurance agent reading this, you have some solid points for investors out there, especially when it comes to Replacement Cost versus Actual Cash Value. For some, ACV may be enough if they have a total loss (loss amount is equal to or greater than the limit of insurance), if their purchase price was a low one, but it really is in the partial losses (loss amount is less than the limit of insurance purchased) that one has to consider if they will have enough to do the repairs they need after accounting for the deductible. That is where you really notice the impact depreciation can have on a claims settlement.

    There are programs out there who cater specifically to investors and can tailor coverages to fit their specific business model. Sometimes traditional insurance policies may require investors to insure for higher amounts than they want, causing the premiums to be also higher than necessary.

    The main thing that I wanted to add since I primarily work in loss prevention now is to not assume that insurance will cover everything. Make sure your agent is someone who is willing to take the time to educate you on your coverages so that you actually understand what protection you do – and don’t – have. As claims frequency can also get you into hot water, it’s always advisable to look at insurance as something to fall back on for the instances that could take you out of business…for catastrophic losses in other words. From what I’ve seen on my end, many of the claims that happen with theft and vandalism, fires, and pipes bursting (really the top 3 causes for losses at investment properties), can be prevented by having good security measures, being sure you or someone you trust is regularly monitoring vacant properties, great tenant screening procedures and by following a regular maintenance schedule. I am not saying the unexpected won’t happen, but there are a ton of simple things that investors can do in terms of prevention, that save a TON of headaches and keep their business humming along uninterrupted.

    • Drew Sygit

      JOHN: you want to make sure that your home owners policy is for a rental. This is different than an owner-occupied policy. You may also want to obtain a general liability policy on top of this to cover all your properties.

  10. Larry Wilke

    All my investments are in Washington & Oregon. Most are not insurable, or just not insured because of the cost. I have an S corp. but have failed to properly separate personal from corp. My investments were all purchased under my name and have not yet been transferred into the corp. or other entity. I need advise on which entity (Corp., LLC., or Trust) will fit my situation best. Our corp. is not single owner, but is family owned with my wife and son. I presently do everything myself, (buy, sell, manage, remodel, develop etc.) I know I need to get my act in gear. I need advise, but hate most attorneys. I am 75 with time running out. I need to straighten things out before I pass things on to my heirs. Any advise will be greatly appreciated.

    • Drew Sygit

      @LARRY WILKE: while we empathize with your position, we can’t give you specific advice that may be considered a violation of laws against us giving unqualified legal or financial advice.

      You appear to have several potential liability and tax issues that you should discuss with a competent real estate attorney and CPA familiar with real estate issues.

  11. Deanna Jones

    I’m interested in investing in real estate, so I could use some advice that will protect me legally since I’m new to the game. I thought that you made an important point about the importance of hiring a separate LLC to manage my property as a way to protect myself from being liable for any damages that are done if something goes wrong with the management process. It seems like it would be easier to manage through a separate LLC, so I should probably do that rather than manage directly through one. Thanks for the tips!

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