Rental Protection - Insurance or LLC or something else?

Question

Hello BP - I currently have 3 rentals in Raleigh, North Carolina and hoping to add a few more through the spring.  At the moment I manage the properties myself to keep costs down.  When it comes to insurance, I have personal and renter's policies in place for all the units.  My question is that as I grow in size, would you recommend moving the properties into LLC's/Holding companies OR continue with strong insurance policies to ensure protection?  Thank you in advance and I'm open to any advice in the space!

Michael Norris · Answer

Having an LLC is not a substitute for having a "strong" insurance policy. Putting the homes into an LLC (or separate LLC's if you really want to add layers of protection) does not really negate the need for insurance. Separate LLC's give you the option of going BK on the one property without losing all of your properties or losing your personal home or assets. I'm an insurance agent not an attorney so you need to speak with an attorney for real legal advice on that subject.

The definition of insurance is the transfer of risk. Having low coverage does not make you a bad person - it just means you are willing to assume more risk in a given situation. You need to define your risk tolerance by asking what if questions and speaking with your agent.

The LLC gives you and extra layer of protection (this is managing your risk vs transfer of risk) in a liability situation should the tenant want to come after you for a significant injury. Picture something bad - Just this morning I saw there was a fire in a local duplex and a child with downs was inside the home and the mother died trying to rescue him. Besides the human element on loss of life how secure would you feel with your current policy if that was your property?

If it was truly an accident then your policy would pay out to the limits (hopefully you have more than $100,000 in Liability coverage!!) and they could still try and sue you or the LLC for injuries above and beyond the $100,000 if that was your policy limit.

If each home is in a singular LLC you could try and go bankrupt and let the house go as the only asset the tenant could collect and that "should" be the end of it.

**However** - if they can show some sort of negligence on  your part. Like there was a wiring issue that needed to be repaired and you had not fixed it yet. Then they could claim negligence on your part and still come after you personally.

Even without a negligent situation they could still try and come after you personally (it's a burned up kid - no matter what the facts are you are the big rich landlord and in our society "somebody has to pay".)

In the end paying several hundred to a couple thousand dollars per year extra for quality insurance can really come in handy if you ever get that 3am phone call.

Last - I didn't see someone post this yet. Most mortgages have a "due on transfer" clause that could be triggered if the title transfers.

Jonathan Farber · Answer

@Michael Norris Thank you for the fantastic reply.  Really great advice!!! Look forward to connecting further.

Adam Schneider · Answer

@Jonathan Farber

Are you going to refi the properties? Then, you might want to throw into an LLC. There are LLC benefits other than insurance concerns.

Jonathan Farber · Answer

@Brie Schmidt the properties have residential loans.  Thank you for the tip!

Brie Schmidt · Answer

@Jonathan Farber - Do the properties have residential loans?  If so transferring to a LLC will provide little protection because the veil is already pierced.  Get a good umbrella policy

Daren H. · Answer

Umbrella policies work as someone mentioned above. A lot of umbrella policies require you to over insure your auto policy with full coverage, high limits which can add a thousand  $$ or more a year to your auto insurance and then the umbrella policy costs ~$400 a year on top of that. One option, while you are small, is that you could get a rider/endorsement to extend the liability coverage from your primary residence policy to your rentals. For instance, if you have $1M liability coverage for your primary policy, for about ~$50 you can get this extended to your rentals. And it has no impact on your auto insurance.  It essentially is an umbrella type protection via your primary policy. Check with your insurance provider and read your policies carefully to see if it meets your risk tolerance. As you grow, you can consider other options. Regardless, good insurance is still going to be needed even if you are an LLC.

IMO, decisions on LLC, insurance, etc for protection purposes also has a lot to do with what you are trying to protect in regards to net worth.

Tiffany Alexy · Answer

This is an old thread, but I've faced the same problem.  Many investors say the chances of triggering the due on sale clause are low (the clause that states you owe the full balance of the loan when you sell or transfer title) but it has to be a risk you're willing to take.

The properties that I have loans on, I hold in my personal name.  Not ideal but I do have an umbrella policy for that reason (and many others).  IMO, it shouldn't be one or the other, but both LLC and the umbrella insurance if you can do it.

One thing to add since I notice you self manage- you do make your tenants get renter's insurance, no? Make sure they add you as an additional interest.  That way they can't get a renter's insurance policy, show it to you, then cancel the next day- if they change their policy in any way you will be notified.  This is at no additional cost to them! Many property management companies require it now.

Adam Schneider · Answer

@Jonathan Farber My gut tells me to leave them alone and just consider putting future rentals into LLCs based on what you've said.

Jonathan Farber · Answer

@Adam Schneider  They are conventional loans with decent interest rates so I wasn't planning to refi unless there was a benefit to do so?  Thank you for the comment!

Rental Protection - Insurance or LLC or something else?

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