Legal protection for renting out ADU when living in main house

[Eugene Kim]

A couple months ago, my partner and I purchased a single family home in Los Angeles from the previous owner. The house has a detached garage at the back of our lot that was converted into an ADU (Accessory Dwelling Unit) by the previous owner (was done with all the necessary permits). We are living in the main front house and renting out the ADU to a tenant.

My question is, other than having landlord insurance on the ADU, a solid lease agreement, and a 3rd party management company as intermediary to help manage repair needs/requests (my partner and I both work full time jobs) and showings when the unit is vacant, is there any legal entity protection or other avenue that will protect us further in case of a tenant lawsuit? If this entire property was a rental property, I would have probably just created an LLC and put the mortgage and deed in the LLC's name. I don't believe there's a way I can bifurcate only the ADU into an LLC as the entire property is one single family home property for legal purposes, even though the ADU has a separate address for mail purposes.

[Dan H.]

I like umbrella policies for asset protection.  this is what I see as some of the advantages of umbrella policies:

• No need to isolate finances as can be the case with other protection mechanisms.  There are legal courses taught on how to pierce the protections of LLCs.
• If you use an LLC, the assets held by the LLC are still at risk. I do not know about you but I would not be thrilled to lose a single property even if my other assets were protected.
• In CA, the LLC has an $800/year minimum cost.
• If I get sued, I like to know the insurance company has more to loose that I do.  You can be confident that the insurance company will attempt to limit their losses.  This implies that you basically are going to have a heavy weight (the insurance company) in your corner in any suit.
• One umbrella policy can protect all assets. If using an LLC, you typically would use an LLC for each properties, otherwise there is risk of losing multiple properties.
• I find the cost of the umbrella policy to be reasonable.  My issue is not so much the cost of the umbrella policy, but finding insurers that will provide the level of coverage we desire (they believe we are too high risk to provide us the coverage that we desire).  This cost allows me to sleep worry free.  Note I have been threatened with law suit many times (likely over 50 times - but most have so little merit they are laughable) including multiple times from the same lawyer.  I call him two-bit.  He hates me.  I have never been sued related to RE including by two-bit lawyer.  If I did not have the umbrella policy it is possible that the threats might bother me.  With the policy it bothers the person making the threat more than it bothers me.  Two-bit has sworn at me when I once told him that I hope he had a lot of money because my attorneys are not cheap.

I think in your case, you can likely get away without addition asset protection.  However, why risk it?  Umbrella policies do not cost a lot and provide good protection on virtually everything.

Good luck