LLC vs Umbrella policy? (Another one of these...)

[Shannon Vanderweide]

The dreaded LLC vs Umbrella policy question.. again.. Just to start off, I want to mention that I have read through a hundred or so of these posts on this site already as well.

I can't seem to find a local real estate attorney or any attorney that knows a lot about real estate investing and LLC's, which is why I am hoping someone here can point me in the right direction. Originally I had full intentions of creating an LLC as well as having umbrella coverage. Recently I learned that it can cause issues with lenders for future properties and if they decide to call the current mortgages due for transferring them to the LLC..

I have a single family home and a duplex that is owner occupied. I intend on purchasing another single family home in the next month or two as well. All properties have mortgages and will continue to have mortgages until I decide to sell them. Total value on the current properties is roughly 220k. I manage my properties myself and will continue to do so. I also do most maintenance myself unless it is something major.

I have read that LLC's will do nothing for someone who self manages and self maintains their properties, due to the risk of lawsuits.. (Example: If something plumbing not done correctly and I am the one who fixed it, the tenant or whom ever can sue not only my LLC but also myself since I did the work..)

I want to do the correct thing, as I plan to expand further in the next few years, but I am having trouble figuring out what the correct thing to do it.. Can anyone touch on this? 

[Brandon Hall]

Using an LLC for rentals provides extra complications and hassles, of which you've already mentioned. However at the same time, if appropriately structured and accounted for, they can provide additional liability protection.

I heard an interesting story once which I talk about on one of my podcasts (can't post links). Basically, a gentleman owned a large real estate portfolio and adhered to the "if I'm nice to you, you'll be nice to me" mantra. Instead of worrying about asset protection, he picked up an umbrella policy that adequately insured his properties.

Unfortunately, his son (teen) was drunk driving and got in a wreck. The victim survived and her family sued the crap out of the boy and his family. This real estate investor (the boy's father) found his real estate empire, which he poured blood, sweat and tears into over the span of two decades, wrapped up in the lawsuit. 

After hearing this story, I conferred with attorneys on the matter because I wanted to know how entities would have protected his teal estate. Turns out, proper entity structuring could have rather easily protected his real estate from this suit. Would a simple LLC do the trick? No one knew because entity structuring is highly factual and individualized.

But the message was clear: use entities in your real estate investing.

You're in business. Run it like a professional. At the very least, the entity will protect your hard work from your personal negligence that you couldn't see coming in your wildest dreams.