Owning your rentals in an entity (typically an LLC- Limited Liability Company) is just one of many asset protection strategies for protecting your personal assets from liability arising from your rental activities. However, as explained in my book “Lawyers are Liars- The Truth About Protecting Your Assets” I don’t recommend relying upon an entity alone as your sole asset protection strategy. Instead, I recommend a multi-barrier approach that creates as many impediments as possible between you and any would be litigant.
Here are the most critical steps to take in order to maintain MAXIMUM asset protection when investing in Rental Property:
- Set up an Entity for your rental or rentals. You certainly don’t have to set up an LLC for each rental you purchase, but at least have one (1). You could even risk having multiple eggs in one basket- meaning that you have several valuable rentals in one entity, risking them with each other. HOWEVER, don’t risk your personal assets by owning rentals in your own name or trust. (I realize you have to think twice in expensive LLC states, but at least explore your options for an entity structure).
- Act Like A Responsible Landlord. As a landlord, it is important to exercise due care and take reasonable precautions to prevent personal injuries from occurring on your property. You have an inherent duty to maintain the property in a safe condition and the law does not generally permit a landlord to disclaim responsibility for his/her/its own negligence. This includes if you hire a ‘property manager’. Be careful who you hire and make sure they are liable for any damages or negligence so you can include them in any lawsuit and hopefully mitigate any of your damages. HOWEVER, on the other hand, the landlord is not required to be the “insurer” of the safety of tenants or others who come onto the property. There are limits but make sure you are aware of your exposure.
- Have A Quality Lease Agreement. Although a landlord cannot disclaim all responsibility for injuries, you can certainly take reasonably prudent steps to ensure that any foreseeable hazards and risks are abated or minimized as best as possible. Have a quality lease discussing these risks and do your best to mitigate them. Furthermore, a comprehensive set of rules, guidelines, and policies that clearly set forth the obligations of the tenant with respect to the use and occupancy of property, although may not completely protect the landlord, but may be effective in shifting at least some of this responsibility to the tenant and creating another barrier against liability. Finally, some of your biggest losses can be the result of a terrible lease agreement, damage to the property and not being able to enforce collection. Review your lease agreement carefully.
- Carry an Umbrella Insurance Policy. If you are just getting started and just purchase your first rental, you can probably put this step on the back burner, but not for long. An umbrella policy can provide a significant additional layer of protection and a relatively low cost. In fact, one policy could be structured to cover several rentals and even your personal assets/residence. Having proper liability, property and maybe an umbrella insurance policy is critical for rental property owners. However, it isn’t the fail safe in every possible claim. Believe it or not, insurance companies don’t always rush to your side to pay a claim and there are often exclusions…especially if it’s found you are negligent in any way. Consider a consult with your insurance agent each year to explore your options with an umbrella policy.
- Know What Risks Are You Liable For. When an owner/landlord is sued for personal injuries occurring on the property, the first question will be whether the owner/landlord knows or have reason to know about the dangerous condition that caused the injury. If a particular condition causing the injury was not known to the landlord and could not be reasonably anticipated, then chances are the landlord should not be held responsible. However, if an owner/landlord is aware of a particular risk of danger, then there is a greater likelihood that the law would hold the owner responsible for any injuries arising from that risk. Some typical examples include circumstances where the owner had reason to know of, and please keep in mind this list is certainly not exhaustive:
- Dangerous animals or pets;
- Hazardous conditions on the property due to faulty construction, lack of proper maintenance, serious or sustained water or moisture, risks caused by the surrounding environment, etc.;
- Specific criminal activity creating a risk to personal safety;
- Violations of state or local laws or building codes;
- Misuse and/or misconduct of tenants and/or their guests; etc.
If you have more questions regarding your asset protection exposure and would like a consultation. Please consider calling our office for a consult and speaking with one of our attorneys. We can help determine if and when an LLC is right for you or review your Lease Agreement to say the least. You can reach our scheduling assistant Misty Pasco at [email protected], or 888-801-0010.
Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the new book “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com.