How to protect your primary residence from rental properties

Question

Hi, I am new to BP and also new to real estate investment. We started to invest in rental properties earlier this year and under our personal name currently. I have been hearing about setting up LLC to protect your primary residence home to be impacted by rental properties, but was never clear about why it's needed or how it's done.

1. What types of issues will put your primary residence in danger? There are landlord insurance, renter insurance and also in the rental lease, I see lines stating that tenants should take responsibility if anyone is hurt in the house. Should not those put enough protection already?

2. To set LLC, does it really isolate your primary residence completely? I have been hearing that's not necessarily the truth.

3. Once you start to have more  properties, it looks better to have one LLC per property to completely limit max loss to the specific property if anything happened. Is that the recommendation if LLC is the way to go?

Thanks in advance,

Sam

Nathan Gesner · Answer

Yes, this is discussed and argued on a daily basis.

A couple things to remember:

• Most Landlords will never be sued;
• If a Landlord is sued, most of them will not be found at fault;
• If you are found at fault, the average payout will be covered by your insurer.

I have never been able to find hard numbers, but the risk is very low. Let's say you had ten properties and they each had $50,000 in equity. Someone sues you for $500,000 and wins. Your insurance covers $300,000 and then you lose four of your properties for the other $200,000. That leaves you with six houses, your personal house, your life and your health. I'm willing to bet you have a better chance of winning $1 million in a lottery.

I've asked on Biggerpockets many times for someone to share me a real-world example of being sued and losing property. So far, I have not found a single person that could say it has happened to them.

Your best protection: know the law, obey the law, and treat your tenants honestly and fairly.

Your second layer: insurance on each property

Your third layer: an umbrella policy of $1 - $2 million. It's cheap, easy, and will give you far more protection than you'll ever need.

Final layer: hide it in an LLC.

An LLC involves expenses and additional work to ensure you get the full benefit. Many people operate their LLC incorrectly, which can weaken the layer of protection.

Personally, I wouldn't sweat it. Run your business right and purchase umbrella insurance if you feel more protection is needed. I have 10 properties (25 units, soon to be 28) and they are all in my personal name.

Bjorn Ahlblad · Answer

We have some properties in an LLC and others in my name. We fix all safety things whether they are brought to my attention or we discover them on our own. Our tenants all have fire extinguishers, smoke alarms and CO2 alarms. I make sure hand rails are secure etc. Our tenants are thoroughly screened (by us) and paying rent I carry enough liability insurance to cover all our owned assets. We are small time operators.......20 doors, and I don't worry about anything- my wife worries a little.

John Underwood · Answer

I'm curious to see what other say on this topic. There are many different opinions on this.

Asset protection is comprised of layers.

1. Rental property insurance

2. Solid lease

3. Properties in a seperate LLC. If some one slips and falls and sues the owner, the owner is this LLC. This might prevent them from getting to assets held in other LLC's. If you run over someone in your car I beleive they can still get to things you own, even in LLC's.

4. Having mortgages on you're rentals and personal residence makes it look like you have no assets to go after.

5. Registering the ownership so that it hides that you are the owner. This might make it less desirable to sue you if don't appear to own anything. They could still find out if it goes to court.

6. Putting your residence in a trust. Make your kids the beneficiary and someone else as the trustee.

7. Umbrella Insurance policy.

My attorney and CPA put their heads together and I have a Trust that owns a master LLC that owns my individual rental property LLC's.

The individual LLC's don't have EIN numbers or bank accounts. Off my master LLC their is another LLC with a bank account and EIN. This LLC pays the bills and receives the rent.

I have on tax return.

I paid people smarter than me to set up this asset protection.

I can title cars,  boats etc to the trust.

Anything owned by a trust does not have to go through probate. The beneficiaries just own it when something happens to you.

Sam Shueh · Answer

This is structured with help from an attorney.  As a rule of thumb ,one should carry ambarella insurance on the property making sure it covers rental business lawsuits.

Sam Li · Answer

Thanks everyone for your comments. What would your recommendation for a new investor? We started with 2 rentals and are hoping for growing it to 10 in the next 3-4 years. Based on answers above, below is my understanding.

To start with, without too much work

(1) make sure that you don't play tricks and resolve all safety related issues

(2) get an umbrella insurance to cover you

After you''ve more properties or you don't mind putting extra work to be safer.

(1) set up a trust

(2) move assets or put the asserts into the LLC, and put the LLC under the trust. Put your family as beneficiary

(3) you should still get umbrella insurance as well as don't be negligible on issues  as mentioned above.

Does above sound right and anything to add on?

Thanks

Sam

Sam Li · Answer

@Dan M.Thanks Dan for your insights. I am wondering what would be defined as negligible. For example, if whenever the tenant feedback on an issue, we send someone to check and do repair as needed within a week, would that cover it in general? I am still wondering what's generally considered a landlord's fault. For example, if the tenant slipped inside the house by himself, would that be my issue?

Dennis Wayne · Answer

Well an Llc could help but don’t think for  a minute  it’s a cure all that will save your butt . Lawyers aren’t dumb and they can track your llc at the courts and guess your net worth pretty fast . If a judge rules against you all your personal assets can be seized or liened and a llc won’t necessarily stop that . For best protection and anonymity I would recommend using the strategy of  land trusts and listing your LLC as the beneficiary and someone else in your family preferably out of state as the trustee . Banks won’t lend or BRRR on trusts though so keep that in mind

Dan M. · Answer

In my opinion there is no easy answer to this, its one of those things you really wont know until it happens and you get smacked with a lawsuit. Generally speaking if you have an umbrella insurance policy you can shield your primary and sleep at night and not worry.

1) If you don't have any equity in your home theres nothing for a lawyer to take thats probably the best defensive strategy you can employ.

2) No , in some cases it would not but it certainly does help. It really depends on how negligent you are and if your truly responsible for something like say a hazard, and the tenant repeatedly tells you about it and you do nothing about for months ( they tell you not a property manager right? And its all in texts/Emails ? ) and then their child ends up dying that really puts you into hot water. So basically my advice is just do the right thing and don't put yourself into any situation that would warrant a lawyer going after you in the first place.

3) This is a matter of preference and comfort level. I have 3 LLC's , 2 of which have 2 properties each, 1 that has 11. I know people that do a single LLC for every home like you mention. You really won't know until the hammer falls unfortunately.

How to protect your primary residence from rental properties

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