Landlords, Legal Liability, and LLCs: How Property Owners Cover Their Assets

In This Article

Disclaimer: The following is meant for informational purposes and is not legal advice. For information pertaining to your specific legal situation, please be sure to consult your attorney.

Don’t let your asset protection strategy be an item on your to-do list. The longer you put it off, the longer your assets remain vulnerable to creditors and lawsuits. This includes business and personal assets.

Setting up an asset protection strategy doesn’t have to be complicated. If you separate your assets and follow basic rules as a landlord, you shouldn’t have anything to worry about. These three tactics are a quick way to get started:

• Review ways to prevent litigation
• Get landlord liability insurance
• Form an LLC

These are just some of the ways you can cover your assets. For more information on how to create a comprehensive asset protection strategy, reach out to a legal services provider.

Prevent Litigation at All Costs

The biggest threat to your personal and business assets is a lawsuit. If you can avoid a lawsuit, you won’t have to worry about whether your assets are up for grabs.

There are several steps that you can take to prevent litigation from happening in the first place:

• Maintain the property and each unit accordingly
• Require tenants to report any hazards, leaks, etc.
• Review local, state, and federal laws (Fair Housing Act, Lead Disclosure Rule, etc.)
• Return security deposits (or carefully document repairs and violations)
• Add a renter’s insurance requirement in the tenant’s lease
• Draw up contracts with all vendors and contractors

And the list goes on. Basically, if you abide by the rules and are transparent with your tenants, you shouldn’t have to face a lawsuit.

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

Unfortunately, accidents do happen. It’s not always easy to keep up with maintenance. A small oversight may result in a lawsuit. In addition to lawsuit prevention, your asset protection strategy should include tactics that direct lawsuits toward business assets, rather than personal assets.

Get a Landlord Liability Insurance Policy

Tenants will most likely get renters insurance to cover their belongings in the event of a disaster or accident. But renters insurance doesn’t cover damages like medical bills, additional accommodations, or loss of income. If renters are injured on your property and are looking for compensation, they will come knocking at your door.

This is where your insurance comes in—if you have it.

Property insurance for landlords is crucial for protecting assets. If you are hit with a lawsuit or have to pay for property damages, a good landlord insurance policy will fit the bill.

Unfortunately, not all landlord insurance policies will cover all damages. Shop around to ensure you find the most all-encompassing and appropriate policy for your business.

What Should My Landlord Liability Insurance Cover?

As you shop, look out for the following coverage:

• Uninhabitability
• Tenant property damage and injury
• Liability protection (covers medical and legal costs from property maintenance issues)

These types of coverage will help to ensure that all costs are covered by your insurance. Homeowner’s insurance may cover some costs, but typically does not handle damages caused by uninhabitability or a tenant’s actions.

Separate Your Business and Personal Assets By Forming an LLC

What happens when the costs of an accident or injury exceed what your policy covers? You’ll have to pay the remaining balance.

Let’s say a tenant falls and suffers a serious injury on a cracked sidewalk on your property. The damages reach up to $2 million, but you are only insured for $1 million. Paying $1 million out of pocket is not ideal.

Personal assets are vulnerable to lawsuits and situations like this—unless you separate them from your business assets. There are many ways to separate your assets or protect personal assets from lawsuits and creditors. You could put personal assets in your spouse’s name or set up a trust. But the easiest and most effective way to protect your assets is to form a legal liability company (LLC).

Related: 4 Different Types of LLCs and the Ways They Pay Taxes

Business owners often form LLCs for the sole purpose of asset protection. They can be treated like a corporation come tax time, but they don’t have to be. Landlords can still file a personal tax return as the owner of an LLC.

If you have business partners, you can enter into a multi-member LLC and each claim a share of the business. If you are a lone wolf in the real estate investment game, you can still form a single-member LLC and separate your business assets from your personal assets.

A Strong Asset Protection Strategy Includes More Than One Tactic

Simply signing up for an LLC is not a sufficient asset protection strategy. You will need to pair two or more tactics to truly solidify your assets and give yourself peace of mind in the event of a lawsuit. State laws and policies on LLCs and liability vary.

Talk to a legal services professional for more information on how to fully cover your assets.

Disclaimer: The following is meant for informational purposes and is not legal advice. For information pertaining to your specific legal situation, please be sure to consult your attorney.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.