Rental property LLC vs. umbrella insurance is a common debate among property owners who rent their properties to tenants. Deciding whether to offer umbrella insurance or set up a limited liability company (LLC) to manage the property is an important step in the property management process.

LLC vs. Umbrella Policy

When you obtain an umbrella insurance policy, the coverage extends beyond the standard limitations on a property. It includes additional coverage that you wouldn't get with traditional property insurance policy.

Require Renters Insurance

As a property owner, you may choose to require your tenants to carry renters insurance. This helps to add a layer of protection between you, the owner and the tenant renting your property.

Advantages of an LLC

One of the main reasons real estate investors choose to form an LLC is for the limited liability protection. Another benefit is remaining anonymous to the tenants. With an LLC, tenants will make payments to the business, rather than sending anything to your home address. Having an LLC manage the property will also remove you as the property owner, hiding your ownership.

Issues and Factors

Setting up an LLC does come with some required fees and costs. An umbrella insurance policy will be paid on a monthly basis. For example, you might choose a policy that costs $100 per month and offers $1 million in umbrella protection. The cost for that policy annually would be $1,200.

An insurance policy comes with a number of benefits, including company-appointed lawyers who will defend the policyholders and protect the company from having to pay out on a number of claims. However, insurance policies also have exclusions to the coverage, which can put the responsibility on the property owner for any liability that occurs on the property.

If you are the owner of a commercial property or a multi-unit property, it is recommended to have both an umbrella policy in place, as well as an LLC to manage the property. As you have more tenants renting the property, you become more exposed to liability. However, if you own a single-family home in a nice neighborhood, that you rent out, you may feel like it's less likely you'll be sued. In this case an umbrella policy or an LLC might be sufficient.

Before you decide, make sure to consider both an umbrella policy and an LLC. As you research both options, request quotes and talk to experts to get advice, so you can make an informed decision. It's important that whatever you choose will provide the most effective and efficient protection of your assets.

Umbrella Policy vs. LLC for Asset Protection

Many individuals have built their wealth by owning rental properties. If the amount of income you receive from your rental properties covers the expenses associated with those properties, you can generate cash flow that is predictable and steady. Leveraging that cash flow is easy and safe as you increase your appreciation from a few percent annually to larger gains.

Another benefit of this investment strategy is taking depreciation of any rental properties on your personal income taxes. Even when your cash flow is positive, you can show a tax loss. The tax loss will offset the income from the rentals, which allows you to pay very little taxes, if any, for the first several years of property ownership.

Although it can be very successful, a real estate investment can have downsides as well:

  • Maintenance expenses
  • Filling vacant properties
  • Having to fix things at the property
  • Problematic tenants

Another risk is someone becoming injured or killed at your property. If the incident occurs as the result of negligence, you could be personally responsible, putting all your personal assets at risk. The tenant renting your property can take legal action against you. If the judgment rules in their favor and has a large number of damages, that tenant could come after any investments or assets you have, including your personal vehicle and private residence.

The Role of Rental Property Insurance

As a landlord, your first level of protection is through the insurance policy you have taken out on the rental property. This policy is also referred to as a landlord's policy.

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