LLC vs Liability Insurance vs Umbrella Insurance

[Gareth Lim]

I am a newbie buy-and-hold investor, and in the process of procuring my first rental property, a duplex. I want to make sure that I have the ownership structure set up well, to ensure the best asset protection.

I have heard a lot of recommendation to set up the property under an LLC, and have informed the lender & mortgage broker of my intentions to transfer the title to the LLC after closing - and they have no issue with that, as it they have seen it done frequently.

The issue I am currently struggling with is with liability insurance. The property will have a homeowners insurance that includes a Business Liability insurance for $2mil. I hear recommendations that I might want to have umbrella policy as well. If so, my understanding is that the LLC would possibly need to have its own "Commercial" umbrella policy that is separate from my current own umbrella policy.

My insurance agent suggested that given that I will only own one property, that for now, I should not bother with an LLC, and just have the Business Liability insurance tied to the home + my current personal umbrella policy.

Other option would be LLC + LLC Business Liability Insurance + LLC Commercial Umbrella Policy + Personal Umbrella Policy (which I intend to keep regardless) --- but the costs add up - thus, is this an overkill - what combination of LLC & Insurance would be best to setup for someone like me with one property, and possibly another one in the near future?

[Scott Smith]

Hi @Gareth Lim,

This is an issue that is often debated on the forums, and it often varies depending on the individual you talk to. It ranges as much as each person's personal investing strategy does. It comes down to what your personal exposure is  (home, vehicles, assets, etc.,) and what your portfolio currently is (one duplex,) and future investing goals are. 

I often break it down into the "four pillars" of protecting your assets. The first pillar is a good insurance policy as that cover the majority of your exposure. However, it only protects you from one type of liability: accidents.

After that you want to compartmentalize your assets, which is often accomplished through the use of LLCs or corporations. I personally find the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely - check out this article to learn more. The third pillar is somewhat similar - you want to separate your operations from your assets. That means you establish a Traditional LLC to carry out the operations of your investments, in order to separate the liability from your assets, including: paying property management, paying contractors, collecting rent, marketing, etc. Finally, with the use of Trusts while establishing these structures you can add a level of anonymity by removing your name from public record.

As your exposure increases, it is important that your protection increases with it. This is how the conversation can get get lost on a lot of people - some investors have one property with lots of personal exposure, while others have one property and minimal personal exposure. I give those investors very different advice, even though their "investing portfolios" are the same. On top of that, some asset protection structures scale more effectively than others - so it's important to also factor in the future of what you plan to do.