Rentals and liability.

[clifp]

In the next few weeks, I will be closing on a single family house and 4 plex in Vegas. I purchase a condo last summer which is currently rented. Three of four units in the 4 plex are rented.

My question is how concerned do I need to be a about being sued from the renters and what is the best way to limited the liability?.

The two things I have considered are purchasing an umbrella insurance policy and establishing LLC to put the rental properties in them.

Anybody want to share some thoughts on the pros and cons of each approach, and the importance of doing so?

 

[FIREd]

Here is an older discussion on the subject:

http://www.early-retirement.org/forums/f28/should-i-have-a-llc-for-my-rental-55642.html

Personally, I just got my first 2 rentals in the last year and I decided to go with the umbrella.

 

[clifp]

Here is an older discussion on the subject:

http://www.early-retirement.org/forums/f28/should-i-have-a-llc-for-my-rental-55642.html

Personally, I just got my first 2 rentals in the last year and I decided to go with the umbrella.

Thanks I completely missed that thread. It sounds like step one is to get an umbrella policy it is certainly easiest.

 

[traineeinvestor]

We ended up with some in the name of a company (LLC) and some in our own names - a combination of historical accident (one is a former home), cost (the cost of setting up and running a company in another jurisdiction outweighed the benefits),tax planning and bank lending policies (at one stage you could get a lower interest rate on a loan to individuals than to a company - even with a personal guarantee).

We don't have the same liability issues out here as you do in the US, so that wasn't a factor.

 

[jebmke]

Also remember to have a requirement in your leases that the tenant carry renters insurance with minimum limits on liability. Not all "boilerplate" leases include this.

 

[clifp]

Also remember to have a requirement in your leases that the tenant carry renters insurance with minimum limits on liability. Not all "boilerplate" leases include this.

My property manager leases does require renters insurance, although it doesn't specify a minimum liability. Actually in reading the new lease it is very landlord friendly, since it requires the tenant to indemnify the landlord for any person injured on the property. Of course what is written on paper is less important than who has deep pockets which would be me. Considering the the tenants in the 4 Plex are on SS or in the case of the single mom, poor.

 

[NYEXPAT]

Luckily, no liability here either!

 

[bentley]

Before I rented my first unit, I formed an LLC with my wife and I as partners. I now have 2 units which provide a combined $1150/mo income b4 taxes. This is enough to pay our health insurance.

In retrospect, I wished that I had included the requirement of renters insurance in my contract. When the current renters (2 single mature ladies that pay their rent on time) leave I will adjust the contract to include this. It's hard to require it now.

I did purchase a renters homeowner policy for each unit with $200k liability. With both units owned by the LLC, the insurance is more than property value. Also, be sure to shop around for insurance. I found as much as 40% difference between major insurers. Most of my insurance is with State Farm, but Shelter beat them bad on price with same coverage, and I'm in a hurricane zone.

If they both stay for another year, I guess I could require this in lieu of a rent increase.

B

 

[panhead]

When I purchased my first rental, I went to my lawyer to discuss this very issue. Instead of setting up an LLC, he suggested putting the property ino a realty trust. It was easy and cheap, and offers similar liability protection as a LLC. As always, YMMV...

 

[Nords]

Also remember to have a requirement in your leases that the tenant carry renters insurance with minimum limits on liability. Not all "boilerplate" leases include this.

Now that I've had a few days to think about this clause, what purpose does it serve?

If the tenant [insert liability incident here] the neighbor, the neighbor's insurance company will sue both the tenant and the landlord. Their insurance companies will step in.

If the tenant has liability insurance, then the insurance companies of the tenant & landlord will sort it out with the insurance company of the neighbor.

If my tenant does not have liability insurance, then my insurance company sorts it out with the insurance company of the neighbor. Why would I care about the tenant's liability insurance? Do I incur some additional financial penalty for not having the tenant assume some of the liability exposure? Does my insurance company require me to require my tenant to carry liability insurance?

Meanwhile, what am I going to do? Terminate the tenant's lease for violating a clause? Sue them to recover the liability coverage that I told them to have in the first place?

I think tenants with liability insurance are better than tenants with no liability insurance, but I don't know why I'd waste my time imposing the requirement. It's just like telling a tenant that they can't have a pet or can't smoke inside the residence-- it's unenforceable. You simply put clauses in the lease to cover damages from pets & cigarettes. I would expect my insurance company would sue the tenant to recover any damages that the tenant would be deemed liable for. I don't think I need to put a liability-insurance clause in a lease to make that happen.

 

[bentley]

Norms, my liability insurance agent also recommended a clause requiring tenant homeowners ins. The reason was that, in the event of a liability claim, their ins would be the first to pay, and the majority of these type claims are settled out of court for a few thousand dollars. This would tend to keep my liability ins claim free, slowing the rate of premium increases.

Also, in the event of a catastrophic claim, such as a fire, where everything is a total loss, it's a cleaner settling. Renters ins pays their claims, my ins replaces my rental unit.

B

 

[Nords]

Norms, my liability insurance agent also recommended a clause requiring tenant homeowners ins. The reason was that, in the event of a liability claim, their ins would be the first to pay, and the majority of these type claims are settled out of court for a few thousand dollars. This would tend to keep my liability ins claim free, slowing the rate of premium increases.
Also, in the event of a catastrophic claim, such as a fire, where everything is a total loss, it's a cleaner settling. Renters ins pays their claims, my ins replaces my rental unit.
B

I think we're mixing vocabulary here.

I don't know who your insurer is, but I don't think that tenants rate homeowners insurance. They might need personal property insurance for their personal possessions, but they don't own the home. I don't care what tenants do for their personal property insurance needs, and I wouldn't put any verbiage into the lease.

I agree that landlords should have homewoners insurance. Our mortgage company is kinda insistent on this policy, too. But that doesn't have anything to do with my tenants or their liability or my liability, either-- that's just a fire policy. I don't talk about that in the lease, either.

Tenants could buy liability insurance, but I don't understand why I'd need to put a clause in a lease. I can see that my insurance agent would want my tenants to have liability insurance, because it saves "my" insurance company some money on paying out claims. But my insurance agent isn't offering to drop the price of my own landlord's liability policy, so again I don't see any reason to put any verbiage in a lease.

Again, I don't put any requirement into a lease that I can't enforce. If a tenant doesn't carry liability insurance, what the heck would I do about it-- evict them? I don't see why I'd care.

By the way, many landlords around here have a "No pets!" clause. Of course that's one of the most commonly violated terms of a lease. The tenants have to conform to federal/state/HOA laws on pets, sure, but those aren't my laws. All our tenant has to be ready to do is to pay for the wear & tear consequences of owning pets-- and we tell them in the lease that we'll charge for pet damage.

The upside of not having a "No pets!" clause is that we're "pet friendly". Tenants are willing to pay top dollar to live in a pet friendly place, and the extra rent far more than makes up for any putative damages that we might take out of the security deposit. "Pet friendly" is also a landlord code for "If you're going to bring a pet in here then we're not replacing the carpet until it's at least 10 years old"...

 

[jebmke]

In addition to having the tenant's policy as a first line of defense, the requirement to carry a policy (we require a certificate from the insurer) does act as a filter on tenants. When we submit a proposed lease renewal we expect the tenant to provide a renewed certificate and so far that has never been a problem.

Fortunately our property is in an area that is desirable for renters so we are easily able to enforce insurance clause, no pet clause and no smoking clause. The state is relatively landlord friendly and we could evict and re-rent without a huge hit

 

[Amethyst]

Wow. I see you live in MD, which is, in my experience, a ridiculously tenant-friendly state. Tenants can do no wrong! When I went to the library for books on landlord-tenant relations, there were 3 librarians who stepped up to help me, until I mentioned that I was the landlord. They then pointed to the "reference" shelf and left!

Maybe the part of MD you live in makes a difference?

Amethyst

I The state is relatively landlord friendly and we could evict and re-rent without a huge hit

 

[jebmke]

Property is in VA.

 

[Amethyst]

Ah! That must be the difference. Thanks for clarifying.

A.

Property is in VA.

 

[lukeaa]

When I bought a $million umbrella for my rentals, Geico charged me $210. That told me how much risk the professionals think I have of getting sued with the rentals.

 

[teejayevans]

since it requires the tenant to indemnify the landlord for any person injured on the property. Of course what is written on paper is less important than who has deep pockets which would be me. Considering the the tenants in the 4 Plex are on SS or in the case of the single mom, poor.

Ok, so I come over to visit a tenet and the stairs collapse and I get injured, I can't sue the landlord because the tenant I was visiting sign away my rights to sue.
TJ

 

[clifp]

Ok, so I come over to visit a tenet and the stairs collapse and I get injured, I can't sue the landlord because the tenant I was visiting sign away my rights to sue.
TJ

I am no lawyer but I seriously doubt that any silly one sided lease, would stand in the way of sharp plaintiff lawyer looking to go after somebody with reasonably deep pockets.

 

[Nords]

When I bought a $million umbrella for my rentals, Geico charged me $210. That told me how much risk the professionals think I have of getting sued with the rentals.

Actually it just tells you that GEICO is charging about 15% less than what the other "professionals" are charging.

Insurance companies have actuaries estimate their risks, but they have sales staff set the premium prices to gain market share. I don't think the two groups ever talk to each other.

 

[LeBlanc]

I own 3 SFH's in Phoenix and 1 in N. Las Vegas. I simply have a homeowner's insurance policy on each property as well as an umbrella policy. I've researched LLC and it all sounds like a good idea, but what really turned me off by them is that I read that if you want to evict a tenant, you MUST hire a lawyer to go through the proceedings on behalf of the LLC.

 

[clifp]

I own 3 SFH's in Phoenix and 1 in N. Las Vegas. I simply have a homeowner's insurance policy on each property as well as an umbrella policy. I've researched LLC and it all sounds like a good idea, but what really turned me off by them is that I read that if you want to evict a tenant, you MUST hire a lawyer to go through the proceedings on behalf of the LLC.

Thanks that is new and valuable information I could see how that would be a PITA. I am using a property manager I doubt they use lawyers for evictions.
I've pretty much decide that I'll just stick with an umbrella policy for now.

 

[arebelspy]

I own 3 SFH's in Phoenix and 1 in N. Las Vegas. I simply have a homeowner's insurance policy on each property as well as an umbrella policy. I've researched LLC and it all sounds like a good idea, but what really turned me off by them is that I read that if you want to evict a tenant, you MUST hire a lawyer to go through the proceedings on behalf of the LLC.

Why is that? As owner and acting agent for the LLC, what stops you from filing legal paperwork on its behalf?

That would certainly be true in certain circumstances (such as the LLC being within a self directed IRA where you are hands off), but I can't see how that's the case in the usual circumstance.

Or am I wrong?

 

[pb4uski]

...
If they both stay for another year, I guess I could require this in lieu of a rent increase.

B

Are you sure that they don't currently have it?