6 Ways to Protect Yourself from Negligence & Liability Suits When Starting Out

by | BiggerPockets.com

Negligence and liability lawsuits are common here in the United States. We have all read the headlines about the slip and fall or the hot coffee. As we venture into the world of real estate investing, we need to increase our level of concern over these types of lawsuits. We simply open ourselves up to more risk as we buy properties and grow our businesses. But fear of these lawsuits is not something that should stop you. There are things you can do to protect yourself from these negligence and liability suits, and when you are just starting out, those things need not be very expensive or complicated.

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What Is Negligence and Liability?

Negligence and liability are terms that get thrown around a lot in today’s world, but what do they really mean in a legal sense? Negligence is failing to do something that a reasonable person would be expected to do. Liability refers to the amount of blame or burden someone may have in a particular matter. The terms are related and often go hand in hand.

Negligence can accidental or intentional. You can sneeze, for example, and cause a car wreck  You did not mean to cause the wreck, and you could not help sneezing. So, while you were negligent and may be liable or at fault, everyone also understands that accidents happen. Negligence can also be more purposeful and thus the level of fault or blame will rise. You can intentionally run your car into someone, at which point criminal liability may also come into play.

For real estate investors, not cutting the grass, not clearing sidewalks of snow, not repairing a leaky pipe, or simply not performing regular maintenance on your properties are relevant examples of negligence that can lead to liability. How liable you are for that negligence will depend on the circumstances.

  • Was the condition that caused the negligence something you knew about?
  • Was it something you were informed of?
  • Was it the result of your purposeful action or non-action?
  • Or was it an accident, something you could not have prevented?

These factors and more will all play into the determination of negligence and liability in court.

Related: Tips & Tricks From an Attorney: Here’s How I’d Protect My Real Estate Assets

6 Ways to Protect Yourself

As I said, fear of negligence and liability lawsuits should not stop you from getting into real estate investing. There are several things that any new real estate investor can and should do to protect themselves and their assets from these types of lawsuits.

1. Think about the worst case scenario.

When you are starting out, think about the worst that can happen. If you got sued and lost everything, what would you lose? Your home perhaps? Maybe a car and some savings? For most folks, that is going to be about it. What is the value of all that stuff?

Whatever it is, this is the level of protection you should begin thinking about.  f you have $200,000 in assets, do you need a $10,000,000 insurance policy? Maybe, maybe not. It will in part depend on what allows you to sleep comfortably at night. In any case, thinking about the value of your assets today will get you started in the right direction.

2. Get insurance.

Your first and foremost form of protection is insurance. Let me repeat that. Your first and foremost form of protection is insurance. If anyone tries to tell you anything different, seek new advice. Insurance, especially at first, is what is going to protect you against claims upon your house, car, and savings. It may even pay for a legal defense should the need arise. Get a good liability policy for you, your family, your car, and your properties. Especially focus on your car, as that is where your greatest risk will be. An insurance friend of mind says that everyone carries all of their assets in their trunk. It is true, as one bad sneeze can lead to a lawsuit.

Make sure your coverage limits, especially on your auto insurance, are high enough to cover the value of your assets and more.  Update your homeowner’s policy, as it may not cover everything or it may not be enough with your new real estate ventures.  Find a good insurance broker who understands the needs of a real estate investor and spend some time with them. Spend more time with them as you grow and expand.

3. Protect yourself with contracts.

You may not realize it, but you can contract liability out. You can make your tenant responsible for yard maintenance or snow removal, for example. Or you can make a contractor responsible for workman’s comp insurance. Having and using good contracts, such as a lease, go a long way towards negligence and liability protection. Always insist on a written lease with tenants. Always insist on a written contract before working with any contractor. Have those contracts reviewed by competent professionals to make sure they will work in your area and in your favor.

4. Keep your mouth shut.

Do not brag about your new real estate ventures. That will just make people jealous and make you sound boastful. Plus, people will think you have lots and lots of money, effectively putting a target on your back. People talk more than you realize. Keep your efforts to yourself.

Related: 3 Benefits of Holding Your Properties in an LLC

5. Be kind.

Being kind can go a long way. Do not be the jerk that people want to sue. Treat your tenants, contractors—and everyone else for that matter—fairly and with kindness. Apologize if something is your fault and try to make it right. Being nice may just keep you out of court.

6. Save the LLC for later.

If you are only buying a rental home or two to start, you generally do not need an LLC. You may as you grow, but not yet. Get your business up and running first. Acquire assets to protect, then look at more involved strategies, like LLCs, later on. LLCs cost money to start and maintain. They create extra hassles and paperwork, and no bank is likely going to lend to your LLC at first anyway. Attorneys also know how to find you and pierce the corporate shield if they need to. So focus on getting started first. See if you really like this real estate thing. You can always—and will likely want to—get more complicated later on.

The bottom line is to not worry so much about lawsuits. Sure, they are a concern, but there are steps you can take to protect yourself. Stop asking yourself what if. That only leads to paralysis and inaction. Take the steps mentioned above, then get out there and do it.

Any tips you’d add to this list?

Leave them below!

About Author

Kevin Perk

Kevin Perk is co-founder of Kevron Properties, LLC with his wife Terron and has been involved in real estate investing for 10 years. Kevin invests in and manages rental properties in Memphis, TN and is a past president and vice-president of the local REIA group, the Memphis Investors Group.

14 Comments

  1. Jerry W.

    Kevin,
    Much of this advice is pretty good, but #6 is dead wrong. Not kinda wrong, but completely wrong. In most states forming an LLC is a fraction of the cost of even a 6 month insurance policy at low levels. it is $100 in my state. They do offer a huge amount of protection if done right. They are very difficult to pierce if operated right, and doing taxes on them is not much more work than doing your own regular taxes for a rental. Getting educated on how to properly operate LLCs is important, just like knowing about how to invest. You can operate without an LLC or another entity, and your interest rate for a corporate type entity in my experience is about 1% higher than if you get the loan in your personal name. You will still have to personally guaranty the mortgage on nearly all loans to your LLC. Insurance is very important, but the cost of an LLC is very tiny. it is harder to separate your liability from an LLC’s liability when you personally operate or manage the rentals.

    • Kevin Perk

      Jerry,

      Thanks for reading and taking the time to share your thoughts.

      We will just have to agree to disagree. I simply do not feel it is needed for the first time investor who starts off with a house or two. I did it, and It was just not necessary. Of course as you progress in your investing career or are buying an apartment building then I would suggest it.

      It ultimately comes down to what makes each individual investor happy and able to sleep at night. That is going to be different for everyone and could range to holding things personally or having a separate LLC for every property. Neither way is completely wrong or right.

      The difference of opinion here is what makes real estate so great. There are so many ways to go and get started and you just need to listen to all the advice and pick what works for you.

      Thanks again Jerry for sharing, you give good advice and I do appreciate it,

      Kevin

      • Cornelius Charles

        Kevin,
        From my experience, a lot of newbies set up an LLC as one of the first things they do, as that seems to be what most of the gurus teach. I wonder what percentage actually end up doing a single deal, let alone multiple deals. For that reason, i would agree with setting up a LLC later. We have only done 1 flip so far and i can’t say that setting up a LLC would be something i would do if i had to start over.

  2. Ali Hashemi

    Cool article Kevin, good things to think about!

    I especially like #3. When considering whether to let my tenants manage grass cutting and other property maintenance ‘things’ I tend to err on the side of NOT allowing them to manage it. The exterior image is part of my brand and I feel I care more than most tenants about making the property look GOOD. HOWEVER, your article made me stop and consider what the risks are. Is protecting my property’s brand/image worth the risk of liability? Or would it be better to contract out the liability and risk a tenant not taking care of the property. I’m not sure but it’s a good thing to consider.

    I agree with Jerry W…..an LLC is so easy it’s crazy to not do it. I don’t agree with #6 but otherwise great article!

    • Marilyn na

      I am uncomfortable with having your tenants do exterior maintenance, generally, but in no way does it remove the landlord’s liability for injury due to poor maintenance. Typically, joint and several liability means the injured person can sue everyone with a responsibility for maintaining the property. Most likely your tenant will not have deep pockets and if they do have insurance, their insurance will refuse to pay. The landlord has the best ability to pay and injured parties will most aggressively seek payment from those best able to pay. It would then be the landlord’s responsibility to recover those costs from the tenant. I know we want to get as much money as possible out of our properties but if paying for snow removal and grass cutting destroys your profit, you bought the wrong property.

      • Kevin Perk

        Marilyn,

        I pretty much agree. But the point remains that you can still contract out some of your liability if you choose to. Will you still get sued? Probably. Will the contract make you less liable? Maybe, depends on the situation.

        Good points though and thanks for adding to the discussion,

        Kevin

    • Kevin Perk

      Thank you Ali.

      You make valid points.

      But an LLC does add time and expense. There are filing fees, out of state taxes (if you have one of those), local business taxes, separate bookkeeping, separate bank accounts, separate credit cards, separate IRS tax returns, annual reports, annual meetings, annual minutes, finding funding, ensuring everything is titled properly and the time keeping all of that together.

      I am not knocking corporate entities as I have several, but for the first time investor, I just do not think they are worth the trouble until they get a little more involved in the business.

      The above and your other comments go back to my reply to Jerry above. There are a million ways to do this business. None are completely right and non are completely wrong. We all do what we think will be best for our business.

      Thanks again for reading and commenting,

      Kevin

      • NA Henson

        Kevin, I found your article simplistic and not correct on many points of risk and law. Depends on what State you own investment property but for all 50 States form your business entities before you purchase investment properties. Always, always segregate your personal assets from your non-exempt business assets. Never own non-exempt or risky assets in your own name or a sole proprietorship.

        I live in a very strong Asset Protection State. Even in my State a formal business entity is needed if you want to be serious business owner. A Series LLC (or old fashioned LLC will work) as the Management company (manager) with no assets of its own, deals with the outside world, signs all contracts, makes all deals, takes payments, pays the taxes and all the bills. It is the Manager of the underlying Asset Owning Series LLC. The Asset Owning Series of a Series LLC has no dealings with the outside world. The outside world deals only with the management LLC. If you want stronger protection and anonymity purchase all real property in the name of a Land Trust. This adds a layer of protection. The trust forms are fill in the blank so can be easily done on each new property. The private non-public Trust agreement will show what Series of a Series LLC is the beneficial owner of the Trust. Title companies and lenders are use to seeing the name of a Trust on purchase contracts. In truth and in fact a proper Asset Protection Plan is not that expensive, much less than the outrageous insurance policy limits you propose in the article. Are you an insurance agent earning commissions?

        LLC and Series LLCs have charging order protection. My company agreements state any member that has a charging order against them gets no distribution. There is nothing a bogus creditor can do to force a sale or a distribution or turnover the cash accounts.

        Please remember, there are firms that are hired to find insurance coverage. The person with the largest insurance coverage gets named first on the lawsuits I file. You just painted a target on your back. Always purchase a modest amount of insurance coverage. Investors, please do not believe Kevin when he tells you an enormous insurance policy will let you sleep at night. It will not. A good creditor/plaintiff’s attorney will make your life a very inconvenient (maybe hell) and you will lose sleep responding to all of the issues and discovery requests and sitting for depositions and pre-trial hearings for as long as the lawsuit drags on. All that time will be spent away from running your business and spending time with your family.
        Monty Henson
        Long time Active REI
        Licensed Attorney
        Asset Protection Expert
        Austin, TX

        • Mikael Lickteig

          Hi Na,

          For many first time investors such as house hackers you cannot get a loan with an LLC as they are putting less than 20% down. Would you recommend these investors shy away from buying their first property until they can use the LLC?

          Thanks,

        • Kevin Perk

          Mr. Henson,

          Thank you very much for your insightful comments. This post is doing what I hoped it would, that is generating discussion on on what is an important topic. You additions to that discussion are appreciated.

          I would have to say that, in my humble opinion, I find your advice overly complicated. Please remember that the post is discussing options for the first time investor who is looking to perhaps purchase one or two rental homes. They are not yet a “serious business owner” but are only getting their feet wet so to speak to determine if this serious business is one that they might want to develop further. Nor are they getting into an apartment complex with dozens of tenants or into partnerships developing land which would expose them to much higher levels of risk.

          Is there a time and place for all of the items you describe? Absolutely. Is it when you are just starting out as I describe? I’m sorry but I think not. Series LLC’s and land trusts are a bit much for that level of risk. As one becomes more serious in the business, then yes, increase your level of complication.

          I also think you might have misread me a bit. I never said to get a large insurance policy in order to sleep at night and the large example I used was an exaggeration to make a point. Which was to get insurance to adequately cover your assets and to do what makes you feel comfortable. If that includes using an LLC and land trust then by all means do it.

          As I said to Jerry above, real estate is a wonderful thing because there are so many ways to do it. Each person, depending on their own levels of comfort and experience, can design something that works for them. They can take the route you suggest. They could even go the exact opposite route as some investors I know who have dropped the series LLC on their dozens of properties and upped their insurance because of the levels of complication and tax consequences (I could not sleep at night at that level however.). Either way, I do not see one as completely right or completely wrong. It is up to the individual to seek advice and do what is right for them.

          Thanks again for adding your thoughts to the discussion. As I said I appreciate it.

          Kevin
          Longtime landlord
          Non-seller of insurance or asset protection strategies

        • Joseph Kirkland

          Mr. Henson

          I think you are being a little harsh, I too am an attorney and have been practicing for 40+ years. You practice in a state without a franchise and excise tax on the book value of the assets in an LLC and its net income. In the state Kevin is in, Tennessee, the state burdens the investor with these expenses.

          For the small investor, a series LLC with the associated additional federal and state returns as well as the separate bank accounts required and the associated bookkeeping burden may not warrant the structure you suggest. The asset protection you suggest is untested in many states as to whether the protection will stand up. Pity the small, unsophisticated investor that co mingles funds between personal assets and their LLC or between the Series within the LLC. Sole proprietorship with insurance coverage is a viable alternative.

          In all my years of practice, I have never seen the crazy verdicts that would not be covered by insurance. Could it happen, YES but the small beginning investor needs the insurance for defense cost alone. The VAST majority investors owning individual SFR properties will never have a claim if they run their business properly and those few that might will find insurance sufficient to protect their personal assets. Without exception, until you post, I have never had an attorney or a self styled asset protection guru suggest that the first and primary form of asset protection was anything other than insurance.

          Frankly, I feel that Mr. Perk’s post was spot on and good advice from one investor to another. You advice may have a place for some investors with great personal assets to protect and who possess a high degree of sophistication but the Series LLC and Land trust structure is a bit much to digest for the beginner.

  3. Jerry W.

    Kevin,
    After adding my comment about what I disagreed with I forgot to say how much I enjoy your articles. I had not seen any for awhile. While we disagree on forming corporate entities, I really like your insight into the rental game. You have clearly been at it and have lots of real wold experience.

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