Help a Reader: Insurance for Rental Properties

This question was left yesterday on my post titled The Basics of Umbrella Insurance:

Who can advise the best way to protect rental properties? We now own 4 rentals in addition to our home and will be buying 2 more. Would a financial planner or a CPA be the right people to go to for advice?

Anyone have any suggestions?

Comments

[Kevin]

Go to a CPA with experience in this area to learn how to structure ownership of the rentals. Do you own them all personally now? Most likely, they will have you set up an LLC to allow for greater protection of personal assets. IE - if something happens on the rental property that causes you to get sued, having the properties in an LLC will add another layer of protection for you.

I would stay away from corporate ownership of real estate for many reasons - tax rates and getting money out of it without causing a taxable event being 2 of them.

[ryan]

get an umbrella policy above and beyond your rental property insurance. that is all you need.

if you dont have them in an LLC, you probably should, even though some lawyers will tell you it doesnt much matter as long as you are insured.

all the insurance will do is protect a lawsuit from taking your personal residence/possessions.

[Kyle]

I would keep each property in its own separate LLC to ensure a problem with one doesn't jeopardize another property. It is VERY important to keep each LLC well-capitalized, since if you merely hold a building without much equity and no cash reserves or insurance, the courts can and will pierce the corporate veil and hold you personally liable for damages. If each LLC has a few thousand in cash reserves and its own basic insurance coverage, you diminish the chances of this greatly.

[Dedicated]

You should get 3 professionals - your insurance agent (hopefully a broker with many insurance options), a lawyer and a CPA.

Set up an entity (LLC,S-Corp or even a Trust) where the entity will be the owner of properties. A lawyer and CPA can do this for you if you don't know how.

Then insure all properties with the same insurance company - policies named owned by the entity. This is like home owners, but double the cost - discounts may be available for multiple policies. Then your agent should suggest an Umbrella over it all. Which can be done if all policies are from the same company.

You become an employee or shareholder or trustee and receive an income in the form of a paycheck. Once a taxable check is in play, you can also make draws (in proportion to your percentage of ownership).

As long as you do not co-mingle personal funds, you should be safer.

[Meg]

I looked into forming an LLC when I began purchasing rental properties. I was told that was a great way to protect your personal assets since only the LLC would be sued and could be held liable. That way you could only lose the home/the equity in the home, but your personal assets would be safe.

However I talked to many people (fellow investors and friends who are attorneys) and determined that an umbrella insurance policy is all that is really needed in most cases.

LLCs are just as effective, but they are very expensive to set up, and the legal fees will kill your cash flow if all you have are a few properties to insure. Plus LLCs become less effective as equity in your properties grows. Even if you set up one LLC for each property (which is obviously even more expensive) then the equity you have in that single property is still exposed.

Additionally, it gets very complictated to deal with an LLC. In many cases your LLC cannot actually hold sole title to the real estate - your name would have to be on it too (in which case you may not be fully protected) unless the LLC qualifies to hold the mortgage without you signing on it. But banks won't lend directly to an LLC until the business has existed for X number of years and is Y profitable. Of course then interest rates and all fees are higher because then it's a business loan.

Even when the LLC manages to qualify to hold sole title and mortgage on the property, in some states you cannot refinance or pull out equity without switching title to your name and then switching it back (hello title fees!).

Rather than pay out the nose for some professional to keep up with all this and make sure I'm administering my LLC right on top of everything, I decided a simple umbrella insurance policy in an amount just exceeding my total assets is all I need.

[sow]

We formed an LLC last year to hold our real estate assets. We also have a sizable umbrella policy as well. The LLC separates our personal assets from the business, and the business assets from our personal.

People will sue for whatever the damages are. If your umbrella policy can't cover it, then all of your personal assets are at risk. We're talking about home, cars, cash, Qualified Retirement Plans, investment real estate, stock, etc.

I know it costs some money (we actually set up 3). But better to have it set up and not need it than to not set it up and need it down the line. Remember what the rich do. They look at the returns first of a financial decision and cost second.