I know this question has probably been asked before, but after searching the forums, I couldn't find a clear answer. My wife and I are starting our journey with our first STR and I wanted to ask: Should we use an LLC for our Airbnb, or would an umbrella policy on top of our current insurance policy suffice?
The mortgage is currently under my name, so I'm unsure what benefits, if any, I'd gain from using an LLC in this situation. Our main goal is to ensure we're properly protected.
Additionally, should we allow pets in our STR? I've heard conflicting views on this. Some say it increases bookings, while others mention concerns about damage and additional cleaning costs. What's been your experience?
I’d appreciate any feedback or insights you can share. Thank you in advance for your help!
Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
1y
Neither.
If you need to do something to help you sleep at night, then do the umbrella policy.
Having a mortgage and your normal STR insurance is already 2 levels of protection.
Very few people operate their LLC correctly and therfore this just gives them a flase sense of security.
Moving into a LLC can also trigger the due on sale clause. Talk about sleepless nights wondering if the bank is going ask you to write a check for the rest of your mortgage!
Investor · VA AZ, SC · Member since 2017 · 172 posts · 172 votes
1y
Kenzer,
To your first question about liability, yes a LLC can help protect your assets from taken, but you have to manage it correctly. I recommend that you contact a lawyer to setup this process for you. You will want to transfer the deed for the home to the LLC. You might even want to setup a C-Corp (for tax and liability reasons as well) to manage the business with the guests and pay rent to your LLC. This is a bit more involved, but as you scale, it is something you should consider.
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Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
1y
Neither.
If you need to do something to help you sleep at night, then do the umbrella policy.
Having a mortgage and your normal STR insurance is already 2 levels of protection.
Very few people operate their LLC correctly and therfore this just gives them a flase sense of security.
Moving into a LLC can also trigger the due on sale clause. Talk about sleepless nights wondering if the bank is going ask you to write a check for the rest of your mortgage!
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
1y
Umbrella if your networth is over $500k.
If you’re not worth anything you’re “judgement proof” and don’t need anything.
If you are worth "something" then you need the umbrella policy. If you searched the forums as stated you've noticed that it's been asked EVERY time this question is asked. Has any BP member ever been saved by their LLC? Not once has one member ever said the LLC saved them when insurance wouldn't have.
Think about it. How in the world would you get sued because of something at your STR that wasn't also your fault? You're going to be personally sued no matter the cause of the loss. PLUS, you are 10x more likely to cause a loss personally from a car crash, a pet bite, an injury at your personal home, etc etc. Cases where the LLC would do you zero good.
Umbrella policy as LLC generally isn't worth the money and hassle.
Pets yes but keep in mind they do require more cleaning, maintenance. I wouldn't do pets with carpet but then again I don't do humans with carpet either.
Real Estate Agent · Boulder, CO · Member since 2015 · 284 posts · 226 votes
1y
This is probably the most asked question around STRs. You don't need the LLC but you may want it in the future as your net worth grows. Umbrella policy is fine. I've been an investor for 12 years, have 15 units, mostly STRs, and used to have them in our personal names until this year. We had an umbrella policy and never had an issue. Our net worth is 4mil so our CPA asked us to move them in LLCs last year. It was a pretty annoying process and I'm not sure if its actually worth it, but my husband is risk-averse so here we are. The only note is it is easier to set up the LLC before closing but not so hard to change after.
You HAVE to allow pets. Since Covid this is just the way of the world with STR/MTRs, it can require more cleaning and cause damage but if you want to complete it is a necessity.
Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
1y
Hey @Kenzer Hodgson. So no LLC. It offers little protection against negligence but good protection for contract disputes. You will not get sued over a contract dispute.
The umbrella is a good idea as they are usually not too expensive for the amount of coverage.
Get a good STR policy. Not a home owners, or landlord.
Plus it is a Short Term Rental. AirBNB is a platform where you list that STR.
I know this question has probably been asked before, but after searching the forums, I couldn't find a clear answer. My wife and I are starting our journey with our first STR and I wanted to ask: Should we use an LLC for our Airbnb, or would an umbrella policy on top of our current insurance policy suffice?
The mortgage is currently under my name, so I'm unsure what benefits, if any, I'd gain from using an LLC in this situation. Our main goal is to ensure we're properly protected.
Additionally, should we allow pets in our STR? I've heard conflicting views on this. Some say it increases bookings, while others mention concerns about damage and additional cleaning costs. What's been your experience?
I’d appreciate any feedback or insights you can share. Thank you in advance for your help!
An umbrella policy is fine. LLCs are way overrated.
You can forbid pets, but guests bring them anyway: Recent surveys show that over 50 percent of travelers are taking their pets. So you might as well allow them.
Tampa, FL · Member since 2022 · 3k+ posts · 3k+ votes
1y
If your property is in your name your mortgage may or may not allow the transfer. If they did (at least in FL) you will have to pay transfer (doc stamp) taxes. Not worth it IMO. Umbrella policy is pretty cheap and can protect you with $2M+.
100% recommend being pet friendly due to the stats posted above. Nearly half of our reservations come with pets and to not allow them would put you at a severe disadvantage in a competitive market.
Real Estate Consultant · OH · Member since 2023 · 2k+ posts · 1k+ votes
1y
You need to watch this video from an attorney on why insurance is not the answer to protecting a property from a lawsuit. Why Insurance is Not Enough Unfortunately, the landscape with guests and how often lawsuits are filed, has changed dramatically in the last 4-5 years and it's a risk no STR homeowner should take! Public forms are not the best place for asking legal questions since it's rare to find a unified accurate answer, so hopefully the video helps.
If you need an attorney group to help you structure the right entities for you, we use and highly recommend, Anderson Business Advisors who made the video I have linked above.
As for the pet question, all the stats listed above are why we allow pets unless a homeowner insists a no pet policy. We do charge a pet fee, and it has helped with any extra costs a pet guest has incurred.
As John pointed out, I would not move to an LCC because it could trigger the due on sale clause. I'm sure current interest rates are higher than what you have locked in, and properties in an LLC are subject to higher rates. You could always get lucky and the bank may never call in your loan. It's up to you.
Real Estate Consultant · Colorado Springs, CO · Member since 2014 · 86 posts · 64 votes
1y
Hi @Kenzer Hodgson to @Sarah Kensinger's point above, I'm not a fan of so many people spreading legal advice/insight on the forums, but at least it's better than Instagram/Facebook and YouTube. That being said, I will preface this with the fact that I have a legal background, specifically with estate planning and asset protection as it relates to real estate. However, this is not specific legal advice to you, just an opinion based on the circumstances described in this thread.
Do I Need an LLC to Invest in Real Estate?
The short answer is No, you don't need it. A better question is "Should I have a rental property in an LLC?", the answer there (to me) is Yes. I would never own rental properties in my personal name. Yes, there are many out there that do it and nothing bad has ever happened, and I say kudos to that, I just would never do that. Second, in terms of asset protection, LLCs are not invincible, but I think what many don't understand is that they are not designed to completely shield your assets from liabilities, on the contrary they are designed to contain and isolate liabilities. They keep inside liabilities inside and outside liabilities outside. Read that again. The reason you see a person's name and all their entities listed in a lawsuit is because Plaintiff (the suing party) attorneys have to list everyone and every entity that can be remotely tied to a cause of action, otherwise, if enough time passes and through the legal process discover that a separate entity or just a person was truly liable and they didn't name them in the lawsuit, they are out of luck. Basically, they name everyone because they're hoping and counting on the fact that people set up their own LLCs and didn't adhere to basic entity maintenance and kept things separate (like bookkeeping and separate bank accounts).
Transfer from personal name to LLC/Due On Sale Clause
If one is transferring property title from personal name, a Grant/Warranty Deed would be drafted/recorded to transfer title. NOT a Quitclaim Deed, because Quitclaim Deeds do not fully warrant the rights and covenants of property as does a Grant and/or Warranty (or equivalent depending on state) does. Most purposes that people on the BP forums are transferring properties to an LLC, would be exempt of the Due On Sale Clause. There is statutory, and now Fannie/Freddie guidelines, that exempt many transfers from being subject to the Due On Sale Clause...asset protection/estate planning purposes are covered.
Why Use LLC when an Umbrella Policy Does the Same?
Umbrella Policies are good, but they are not an asset protection tool, they only cover litigation/damages after you’re already in litigation or found personally liable. Also, most Umbrella Policies only pay out if your underlying policy pays out, and the underlying policy will do everything they can to find an exclusion or that you were negligent (which you probably were) in the cause of action to get out of paying the claim. And yes, attorneys make money from forming LLCs, but they make way more when you were negligent and didn’t know what you didn’t know and end up in a lawsuit.
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
1y
@Kenzer HodgsonFor your STR, an umbrella policy can provide liability coverage, but an LLC offers additional asset protection by separating your personal and business assets, which can be valuable in case of lawsuits or audits. However, transferring a mortgaged property to an LLC could trigger a due-on-sale clause, so consult your lender before doing so.
While an LLC does not save taxes, it can make audits more straightforward and help present your rental as a business and you can combine all the hours from multiple STRS into one to meet the MP requirements. This help you with Audit. IRS is saying you cannot combine hours.
This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.
Is your mortgage for a business/investment property or for a second/vacation home? If it's a mortgage for a second/vacation home, you will need to check that it can be transferred to an LLC. You may also need to change to a business insurance policy is that's not what you have already if you went with an LLC.
LLC protections are changing and it may not be worth it as others have pointed out. The IRS changed how they treat single-member LLCs (solopreneurs like myself) and I expect there will be more changes like in Illinois coming. Whether you go with an LLC or continue to own the property in your name, having good liability coverage is always recommended.
