STR Insurance & Holding Title

[Brent Salazar]

Hello BP,

I'm wondering if any experienced operators out there can shed some light on best practices. My partner and I bought a home in our personal names and operate our guest house as a STR. We created an LLC to operate the STR but hold title in our personal names. Our thought for this is, in the future it would help show income for lending purposes and possibly create a liability buffer. I am now looking to get the proper STR insurance on the unit. I have been quoted a commercial policy which is fine, but they are also trying to sell me on a separate liability policy because its operated in an LLC. I also currently have a personal umbrella policy, but they are claiming the personal umbrella wont help liability in the event an STR guest wants to sue. This is because of the operation within the LLC. The biggest reason I have the umbrella is for exactly that reason.

To add an additional layer of complexity I am under contract to buy land and build another STR. If I hold title in the LLC they want to sell me yet another vacant land policy, but If I held title in my personal name my primary home owners/ umbrella would cover it. I wanted to operate and hold title in the LLC as much as possible to protect my assets but I feel like this is getting more complicated than needed. With everything considered I'm wondering if I should just hold title to all my property's in my personal name and operate the STR's in the LLC with commercial policy's but no separate liability coverage. If they sue the LLC and it does not own anything who cares? If they were able to pierce the LLC and reach me personally I would have my umbrella policy to cover liability. Am I correct on my thinking?

Rant over lol, please comment if you have any input! 

Thank you! 
 

[Michael Baum]

Hey @Brent Salazar, do you guys own the home outright? If so then moving it to the LLC is not a big deal, but if you have a mortgage, then you might trigger the due on sale clause which will require a refinance and possibly more down depending on equity.

It sounds like you might have overcomplicated the situation but operating as an LLC but holding the property yourselves vs in the LLC.

I have never seen that kind of situation before. I don't see any kind of benefit to being setup that way IMHO. It seems to have the worst of both worlds.

Do you have a ton of other assets that could be attached if sued?

There is a lot to unpack here. 

[Scott E.]

If I read your post correctly, you are currently running your guest house as a STR, but you do not currently have proper insurance in place. You need to get this fixed immediately. This is an emergency situation.

Regarding further protection, it gets messy and confusing. And you will get a mixed bag of answers depending on who you ask. Generally speaking you start with the right insurance. Behind that insurance can be an umbrella policy. And behind the umbrella policy can be a complex web of corporations, LLCs, and trusts to protect you.

Asset protection can get very complicated. Most real estate investors are probably not as protected as they 'should' be, but most will also probably never deal with a claim.

Talk to an attorney. And seriously, you gotta get that insurance situation straightened up.

[Brent Salazar]

Quote from @Michael Baum:

Hey @Brent Salazar, do you guys own the home outright? If so then moving it to the LLC is not a big deal, but if you have a mortgage, then you might trigger the due on sale clause which will require a refinance and possibly more down depending on equity.

It sounds like you might have overcomplicated the situation but operating as an LLC but holding the property yourselves vs in the LLC.

I have never seen that kind of situation before. I don't see any kind of benefit to being setup that way IMHO. It seems to have the worst of both worlds.

Do you have a ton of other assets that could be attached if sued?

There is a lot to unpack here. 

Thanks for your response, no we don’t own the home out right. Like I mentioned before the initial reason for setting up the LLC and running the short term rental through it was to show income through our tax returns and have more access to lending in the future. In my experience, traditional banks will take 70% of LTR income but not any business income unless it’s shown income on tax returns for 2+ years. I guess I’m kind of surprised that no one else is operating this way. 

[Brent Salazar]

Quote from @Scott E.:

If I read your post correctly, you are currently running your guest house as a STR, but you do not currently have proper insurance in place. You need to get this fixed immediately. This is an emergency situation.

Regarding further protection, it gets messy and confusing. And you will get a mixed bag of answers depending on who you ask. Generally speaking you start with the right insurance. Behind that insurance can be an umbrella policy. And behind the umbrella policy can be a complex web of corporations, LLCs, and trusts to protect you.

Asset protection can get very complicated. Most real estate investors are probably not as protected as they 'should' be, but most will also probably never deal with a claim.

Talk to an attorney. And seriously, you gotta get that insurance situation straightened up.

Thanks for your input Scott, I do have a commercial policy on the STR at the moment. The asset is covered but the liability follows me personally not the business. It was the land purchase that spurred conversations with my insurance agent and unraveled this web. 

[Michael Baum]

Well for me, it doesn't make sense. I am having a hard time seeing the advantage.

An LLC, generally, is a pass through entity. So there isn't a tax benefit that I am aware of.

Is this a way to show income coming to you as a member of the LLC? Are you showing double income? LLC paying you and you also counting the revenue from the STR itself?

Are you trying to build up credit for the LLC so it can borrow directly without your DTI and use only the LLCs?

Sorry I am being so dense, but I don't see advantages here and it seems to only make things more complicated.

[Michael Baum]

Quote from @Brent Salazar:

Quote from @Scott E.:

If I read your post correctly, you are currently running your guest house as a STR, but you do not currently have proper insurance in place. You need to get this fixed immediately. This is an emergency situation.

Regarding further protection, it gets messy and confusing. And you will get a mixed bag of answers depending on who you ask. Generally speaking you start with the right insurance. Behind that insurance can be an umbrella policy. And behind the umbrella policy can be a complex web of corporations, LLCs, and trusts to protect you.

Asset protection can get very complicated. Most real estate investors are probably not as protected as they 'should' be, but most will also probably never deal with a claim.

Talk to an attorney. And seriously, you gotta get that insurance situation straightened up.

Thanks for your input Scott, I do have a commercial policy on the STR at the moment. The asset is covered but the liability follows me personally not the business. It was the land purchase that spurred conversations with my insurance agent and unraveled this web. 

So what kind of commercial property policy do you have? Is it specific to STRs or just a basic commercial policy? You might not be as covered as you think without some of the STR policy protections.

The liability will follow you regardless if you hold the property yourself or in an LLC when it comes to negligence. An LLC can offer some protection, but LLCs are easily overcome when it comes to negligence.

I think things are getting confusing. You might want to call you mortgage company and see if you can move the STR into the LLC without penalty. A lot don't care as long as they are getting paid. You could then create a series LLC with each property held in child LLCs under a parent LLC. It offers more protection overall.

I will say that I am not an attorney so I would consult with a real estate attorney who is also an investor.

Check out this BP blog by @Scott Smith - https://www.biggerpockets.com/...

Lots of info about series LLCs.

[Brent Salazar]

Quote from @Michael Baum:

Quote from @Brent Salazar:

Quote from @Scott E.:

If I read your post correctly, you are currently running your guest house as a STR, but you do not currently have proper insurance in place. You need to get this fixed immediately. This is an emergency situation.

Regarding further protection, it gets messy and confusing. And you will get a mixed bag of answers depending on who you ask. Generally speaking you start with the right insurance. Behind that insurance can be an umbrella policy. And behind the umbrella policy can be a complex web of corporations, LLCs, and trusts to protect you.

Asset protection can get very complicated. Most real estate investors are probably not as protected as they 'should' be, but most will also probably never deal with a claim.

Talk to an attorney. And seriously, you gotta get that insurance situation straightened up.

Thanks for your input Scott, I do have a commercial policy on the STR at the moment. The asset is covered but the liability follows me personally not the business. It was the land purchase that spurred conversations with my insurance agent and unraveled this web. 

So what kind of commercial property policy do you have? Is it specific to STRs or just a basic commercial policy? You might not be as covered as you think without some of the STR policy protections.

The liability will follow you regardless if you hold the property yourself or in an LLC when it comes to negligence. An LLC can offer some protection, but LLCs are easily overcome when it comes to negligence.

I think things are getting confusing. You might want to call you mortgage company and see if you can move the STR into the LLC without penalty. A lot don't care as long as they are getting paid. You could then create a series LLC with each property held in child LLCs under a parent LLC. It offers more protection overall.

I will say that I am not an attorney so I would consult with a real estate attorney who is also an investor.

Check out this BP blog by @Scott Smith - https://www.biggerpockets.com/...

Lots of info about series LLCs.

I appreciate your input, for insurance reasons sounds like the best route to go is to own it personally and operate it personally or own it through the company and run it through the company.

[Melodee Lucido]

Quote from @Scott E.:

If I read your post correctly, you are currently running your guest house as a STR, but you do not currently have proper insurance in place. You need to get this fixed immediately. This is an emergency situation.

Regarding further protection, it gets messy and confusing. And you will get a mixed bag of answers depending on who you ask. Generally speaking you start with the right insurance. Behind that insurance can be an umbrella policy. And behind the umbrella policy can be a complex web of corporations, LLCs, and trusts to protect you.

Asset protection can get very complicated. Most real estate investors are probably not as protected as they 'should' be, but most will also probably never deal with a claim.

Talk to an attorney. And seriously, you gotta get that insurance situation straightened up.

Such great advise @Scott E!

Here is a fun lil horror story to illustrate the need to line up your ducks FIRST!! It will contribute to the importance of insurance (and contracts).
I leased a Panama City, Florida, bay front fixer from a man that lived/worked out of the country. He loved my proposal to l/o the house, rehab it splitting costs 50/50 while I lived there rent free during the rehab. We had our contract---basic lease and option contracts. I was going to run an STR in the home and he would enjoy a higher rent than from a regular LTR rental AND he would have the property managed too.

All was going beautifully. The house, turned duplex, was gorgeous. Insurance was on the list. But I decided to test the Air BNB venture. It was overwhelming in it's success. I made $9K in 5 weeks and was booked for 2 months ahead. Lovely. I contacted the insurance professional to find out how to protect myself in case of something happening. I know, I know, the *** b4 the cart (insert eye rolling emoji here).

The next day we heard that tropical storm Michael (2018) was getting more serious but was still just a cat 3 and heading toward the Florida Panhandle. No one was very concerned. That night I got up to see what the storm was doing. Warnings were out to evacuate immediately---possibly a cat 4-5 was anticipated. Cue the dramatic music and a small single woman racing through the night with her dogs and cats, in pouring rain and unbelievable wind. According to the Tyndal AFB across the road from my place said they registered the hurricane as a 5/6 cat hurricane/tornado combo. Very rare.

Long story short, I lost everything. Nothing to help me recoup. It was a nightmare, truly.
So, that was a great lesson to me. Now I always have every detail in place before I move forward with my properties. Some lessons (on NOT being stupid) are tough to take. Get the insurance!