First House Hack: LLC or Umbrella Policy?

[Shane Bishop]

Hello everyone,

My name is Shane Bishop and my wife and I are looking to purchase not only our first home, but our first investment property as well!! We are looking for an opportunity to do a house hack in the Upstate/Greenville area of South Carolina!  We are currently working with a realtor to research properties so that we can find the best place for us.

One question I was hoping to ask for some advice on is whether or not to create a LLC that we can put the house in or take advantage of an umbrella policy to better protect ourselves from some of liability we will be taking on with this investment property. I have listened to many podcasts and read so many different articles that argue the pros and cons to both, but wanted to seek the advice of the Bigger Pockets community on this to see what many of you have done and what your experiences have been with both the LLC route as well as utilizing an umbrella policy!

Thank you everyone for your help! I look forward to hearing all of your thoughts and possibly forming connections with the greater Bigger Pockets community.

Thank you!

-Shane

[Ben Zimmerman]

The vast majority of landlords never get sued, this is especially true for broke landlords that don't have any money.  And of those that do get sued, most don't end up owing any money unless they are actually doing something wrong.  Even if someone got upset with you, no lawyer is going to take the plaintiffs case unless they feel like the landlord has enough money to make it worth their time to litigate.

This is one of the few times where being relatively poor is actually a good thing. (I'm making an assumption here about your finances, if I'm incorrect then my apologies.)   So with either product it is highly likely that you will be spending money each year on a product that offers you very minimal benefits.

However if you feel you absolutely need to get something, then an umbrella policy is hands down the way to go. LLCs are good for separating your wealth into chunks so that you can't lose everything all at once, instead you can only lose that one compartment of your wealth. However if that one LLC contains your entire wealth (your house) then you are still screwed if that LLC gets sued.

Additionally an LLC only protects you if (among other things) the LLC owns the property. But you will likely have difficulty getting approved for a mortgage in your LLCs name and likely won't qualify for many of the good products available to first time home buyers. For example LLC's can't use an FHA loan and would likely require a 20% down payment.