Liability Protection - LLC? Umbrella Policy?

Question

Hello BP forum -

I'd love to hear how other landlords approach asset protection as it relates to your rental properties.  Is it recommended to place ownership of all rental property into a Series LLC? Or is an umbrella liability policy sufficient?

I currently have three rental properties that will all be free and clear in the very near future.  I intend to acquire another 9-10 properties over the next five years and all will be owned free and clear.  Currently all properties are under my name.  From doing some reading on this forum and elsewhere, the consensus seems to be that this is a risky proposition.  I've had an LLC in the past for a business that we owned for a short time and I wasn't crazy about the paperwork hassle involved in an LLC.  Maybe it's just a necessary evil though.  We currently use all proceeds from rentals to pay off the little remaining debt on one of the properties.  From there all proceeds will go toward acquiring the next property.  I wonder what complexities will be involved in doing this if I form an LLC.

Any and all thoughts and advice would be greatly appreciated.  Thanks in advance!

Ed O. · Answer

Ben  D.
Liability protection comes down to a person's comfort level too. I talked to a local RE attorney that is an investor, and he flat out told me he leans solely on his umbrella policy for protection. 
I prefer a properly operated LLC (again, opinions differ) along with a solid umbrella policy. The challenge with leaning only on the umbrella policy or liability policies are that the insurance companies, if you can believe it (ha ha) have plenty of loopholes in policies to give them an out. 
I do know an ambulance chaser that told me generally, they look for the policy limits and no more when they land a client. 
Jon K. Generally, (NOT an accountant) when selling a home that is not owner occupied for 2 of the last 5 years (doesn't have to be continuous) you will be subject to taxes on the sale. Whether it's in an LLC or not, as far as I know, wouldn't change whether or not you'd be taxed. 
As it pertains to RE taxes, they shouldn't go up based solely on who owns it, a person or an LLC. Does it happen? I'd bet it all that it does. Landlords are treated adversely in many communities, only for the fact, that they are landlords. I have experienced it too many times. 
On the transfer, at least in my area, you simply pay a recording fee and doc prep fee (if you need someone to prep the docs for you). I'd guess the cheapest way might be to have a title company do it.

Jon K. · Answer

I'm inexperienced, so I'm not giving advice...

My previous landlord had an LLC. I made the rent checks out to that LLC. My lease was directly with the landlord. It was my understanding that the landlord owned 10+ properties. I hadn't heard of anyone trying to sue them.

I just got good umbrella insurance. Have content insurance, property insurance, home warranty. Got earthquake insurance. Got something to cover am ambulance call. Got insurance for if they're injured on property, up to a limit.

I wonder if someone, say, sprains an ankle on my stairs if they could sue me for half a million or millions for something trivial. (LOL, Good luck collecting that with my incredibly limited assets.) What if a tenant roommate accidental burns my house down, and it burns down a neighbors house by accident? Can the other tenant sue me and the neighbor sue me also? What if the tenant plugged something in or left a lit candle or a fire pit and caused it through negligence? I believe my insurance would cover only my damage.

I have lease clauses about liability... I wonder if that's useless.

I'm curious about asset protection too. I've always liked the idea of putting any even personal homes in LLCs.

LLCs, from my understanding, take a lot of routine paperwork that you have to keep up with and close records for.

I believe LLCs might change how you owe taxes, turning rental income from personal taxes to LLC taxes. Then, do you have to also pay personal income taxes on the money you "pay yourself" from the LLC?  (Don't quote me on that, I'm just posing questions.) If you had a sole proprietorship, I believe the taxable income could pass through the LLC onto you, and you then only have to pay personal income taxes (not be taxed for the income as an LLC, then individual... with sole proprietorship LLCs.) I've heard over the years that sole proprietorships don't offer the kind of asset protection that other LLCs and trusts do. Is this true?

Jon K. · Answer

Other questions...

What about mortgages?

Tax deductions for home ownership?

If you transfer a 100% owned property into an LLC, what taxes are involved?  Do you lose homestead and personal tax deduction credits on the property?

If there's a mortgage, how does that work?  It is my understanding that some banks won't allow an LLC to hold the mortgage, and that it must be held in your name. Then, you're still linked to the property by the mortgage. Around here, you can't refinance a mortgage unless it's owner-occupied and in your name. In other cities, would you build LLC credit and get a new mortgage in the LLCs name? Then, do you have to pay personal income taxes on the sale of the home? Do your home property taxes go up in your county if the property is a rental property?

David Egger · Answer

I took a landlording class that was taught by a local real estate attorney that also does investing.  Her thoughts were that an umbrella policy would be fine and that LLCs were just extra paperwork.

I went in 50/50 with my father on a duplex, and we put that into an LLC, but mostly to put our ownership rights/responsibilities to paper - I was uncomfortable with the partnership business form.  Now that I'm about to close on a property just for me, I'm sticking with sole proprietorship and my existing umbrella policy.

Liability Protection - LLC? Umbrella Policy?

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