What happens if my apt building burns down and someone dies. How screwed am I?

Question

Just saw on the news that a nearby apt from mine burned down and resulted in one death. Sucks for all parties involved but now its got me thinking it could happen to me. I have the place insured but something tells me this is not enough. I have smoke detectors in all units. I recently put a fire extinguisher on the exterior but before that section 8 never mentioned anything about having them(not sure if they are the right people to check for this).  All my tenants are good people but I wouldn't doubt someone takes me to court because the smoke detector did not have batteries.

Walt Payne · Answer

@Manuel Sarabia  It is a matter of reducing risks, to try to make sure it doesn't happen, and also being on record as doing everything reasonable to prevent it. And of course having good insurance, not just the minimum amounts.

Maybe as part of your next upgrades you could install hard wired smoke and CO2 detectors. They use a battery for backup, but if it beeps and they remove the battery guess what happens? They beep more frequently.

There are various ways to get consultants to inspect your property. Insurance companies sometimes offer free inspections. Same with fire departments. But with both of those you also need to be willing to "pay the price" of that inspection because you WILL have to fix any problems found. That can be both a good and a bad thing. There are also private consultants who will do those kinds of inspections for a fee.

Probably the most important thing is caring and being involved. Visit your properties frequently, and look at them with a critical eye for what hazards exist and fix them. If you are bold, ask your tenants for their input, but again be prepared for the fact that you may be opening a can of worms.

Walt Payne · Answer

Exactly. True asset protection requires a multi-pronged strategy. Risk reduction, hazard reduction, entity planning, and insurance are all part of a good asset protection plan. None of those alone will protect you. All of them together give you a good chance.

I disagree totally with both camps here that say insurance alone will protect you, and that having every property in a separate LLC will protect you. It takes more than either of those to do the job right. I am not a lawyer, but I have spoken with enough of them to know that much.

David Krulac · Answer

@Manuel Sarabia

People WILL take you to court when there is tragedy and money involved.

You should:

1. Own the property in an entity other than your individual name or a trust name.

2.  Not own any other property in the same name as #1

3.  There should be a fire extinguisher in each apt.

4.  There should be multiple smoke detectors in each apt.  Here some municipalities require one per floor(including attic and basement), one per bedroom, and some places require lithium batteries, unremove-able and 10 year life or hard wired interconnected smoke detectors.  Both solve the missing battery problem.

5.  Your umbrella insurance policy should be for $millions.

6.  Your other policies concerning space heaters, flammable fuels, etc should be strictly enforced.

Derek Kartchner · Answer

Risk happens. As an investor you have the risk that a house burns down and someone dies. You also have a risk that you could be responsible for a death in a car accident or in ANY NUMBER of situations. These certainly aren't common occurrences, but they are in the realm of possibility. So what can you do? Risk management! Which is a process, NOT an event. There are five steps sometimes you will see more, sometimes less.

Identify - You have identified one risk in someone dying in a fire, but there are others. There are general categories. For example, the loss of property, human resources (have any employees?), liability (the risk at hand), net income (if that fire takes your building what happens to your income?). Under these categories there are all sorts of scenarios.

Analysis/Measurement - What's your risk? How concerned are you. Tornado's happen, but not in Northern Arizona (where I am at), so I don't concern myself with those risks. Forest Fires do so I concern myself with those risks.

Control - This is where you have to brainstorm. What actions could you take, does it make sense? Fire alarms, Fire extinguishers, smoke detectors, sprinklers, LLC, Liability, etc. Those are all steps in the control process.

Implementation - You have your ideas, now you implement them.

Monitoring - How are those working out? What other issues ideas do people have. What has worked... exactly what you are doing now.

Bottom-line is that you have manage the risk to the best that you can. How? There are many methods here's a couple.

Avoidance - You can not be a landlord... bad plan. You have to figure out what your risk appetite is. We know the benefits of investing, but there is certainly a tradeoff. Also, you can avoid things that might be higher fire hazards. For example don't own properties with fire places or wood burning stoves.

Prevention/Reduction - You can prevent with maintenance, fire mitigation techniques, smoke detectors, extinguishers, sprinklers, etc. You may also have contractual prevention, no grilling in the house (that was in my college dorm lease), etc.  Also, learn and share. If you have a fire that causes little damage, what can you lean that would prevent the next.

Segregation - This is the LLC/Corporation solution. You are separating ownership of the property creating a shield, that can be pierced, if you are not deliberate and purposeful in the separation. As has been mentioned this is one step, not a silver bullet.

Transfer - This is the insurance solution. You are contractually transferring the risk from you to the insurance company, but only up to the limits on your policy. A good umbrella is key. A bad joke in the insurance industry is as follows. "Client: How much liability should a buy? Agent: One dollar more than the settlement." Typically you should have enough to cover any and all assets that you/your entity has.

The bottom-line is that there is risk, you can take steps, but you have to take a holistic approach to risk management and not depend on one option. Once you have your process in place rinse and repeat baby, and then pray... pray it never happens to you... if it does then you are prepared.

Sorry for the long post... I am kind of passionate about this stuff... thinking of blogging.

James Wise · Answer

Agree with @Richard C.

Even if you only own 1 property in your LLC and you do not co mingle funds etc. If you are the one managing said property and you are the one who neglected things smoke detectors, etc. LLC or not, your still screwed.

Richard C. · Answer

You will be equally screwed if you think an LLC is a sort of magic bullet-proof vest.

The vast majority of people with LLCs do not actually manage them as separate entities.  They co-mingle funds, they do not maintain clear and consistent lines of responsibility, etc.  The result is that courts can and do set the LLC aside and allow a case to proceed against the individual.

Steve Babiak · Answer

Hardwired units are required by code in lots of places when there is an electrical upgrade, and I agree they are good.  The carbon monoxide detectors are CO detectors, not CO2 detectors.  And there are now battery units where they are sealed so the battery is not removable.  And combination smoke and CO detectors are available in both hardwired and sealed 10 year battery.

Bryan N. · Answer

@Manuel Sarabia

Do a quarterly or semi-annual smoke detector check.  Buy an umbrella insurance policy to supplement your other insurance.  I don't think there is much else (cost effectively) you can do about  it.

Edward Briley · Answer

@mark

@Mark Whittlesey Your are correct.  I read on one of the forums here a few days back that a property owner requires that a renter carries renter insurance in their lease, but not require proof they actually purchased it.  Also, I know of property owners will use funds out of one LLC account to have work performed on another.  Not long ago I hired a contractor to replace dishwashers in 3 of my rental properties.  He gave me a price to do the total job.  I divided the price by 3 and gave him a separate check from each property account.  Many investors will just write one check out of their private funds to do this, or from one of the LLC accounts.  This is alone to prove that the properties are not operated independently, and therefore opens up the person that is suing to attach all of the owners assets.  I am someone that is anal about making sure I show no connection to me or my other LLC properties.   I also, make sure that my lease holders do have renter insurance.   I was reading that many have installed CO/smoke detectors.  Now even to do this you need to be careful.  If the property did not require these, since the property was built, and has been inspected by a code agency and passed,  that actually it is difficult to prove that you have done anything wrong.  Do I have them?  Yes, but I made sure that a Licensed electrician installed them, and that they were code inspected.  Just using a maintenance mechanic to install them does not mean that your property is code compliant, or has been proven safe.  A few hundred bucks here and there, will absolutely protect you, providing you run your LLC is a single business.  Any and everything that is in a lease, has to be strongly enforced, also, rather you like to do it or not.

Mark Whittlesey · Answer

This may be true. But its NOT an argument against setting up an LLC. It's an argument against NOT running your business... like a BUSINESS.

What happens if my apt building burns down and someone dies. How screwed am I?

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