Archive for the ‘insurance’ Category

LLCs vs insurance for protecting rental properties, redeux

Sunday, October 10th, 2010

I’m opening up the old mailbag and sharing a message that I recently received about operating a rental house business, and my response.

Hi Terry,

Thanks for writing those books – really enjoyed – and found your, ‘Never Sell Your House Book’, especially interesting and helpful.
We’re on our way to buying a new home (got a great deal on a home in a good area w/ a great interest rate ~4.4% w/ no points…), and we hope to rent our existing house out, as you suggest.
Rental comps in the area are ~$1,300/month, which would cover the new PITI…although, in my humble opinion, $1,300/month seems high – I can’t imagine people would spend that to rent…. but I guess they do. I think I would take less for low-maintenance renters.
I like your lease agreement forms in the Appendices.
Q: Would you suggest setting up the rental property as an LLC in order to CYA?
Jay Carson
Dear Jay,

Congratulations on the purchase of the new house. It’s good to hear that you were able to follow my advice and turn your old house into a rental instead of selling it.

In answer to your question on LLCs. Generally, LLCs do not provide an impenetrable  protective shield against lawsuits, contrary to those who  sell and over promote the benefits of these products.

It’s  like hiring Gary Coleman to be your bodyguard. You might have some protection from an assault, but probably not enough.

The best protection against lawsuits is a good insurance policy. If you have a good insurance policy and you are sued, your insurance company should defend you and pay for the damages if you lose the case.

(For a more comlete discussion of this topic see the earlier blog  article, Protecting Rental Properties: LLC vs. Insurance by lawyer  John Gravina.)

If you have any other questions, feel free to contact me again!

Best regards,
If anyone else would like send me with questions or comments, feel free to use the Contact Form on the “About Me” page of this blog.

Protecting Rental Properties: LLC vs. Insurance

Tuesday, May 18th, 2010

I met Tucson attorney John Gravina following a presentation that I gave at the Tucson Festival of Books. We talked about different ways for rental property owners to protect their properties and safeguard their liability.

I asked John if he would write a post for my blog on this topic and he kindly agreed. Below are his insightful comments.


Recently at the Tucson Festival of Books workshop, in addition to self publishing, you mentioned your underlying rental property business. I was more interested in your underlying business since I too have rental properties. I am also an attorney that represents claimants in negligence claims, workers compensation, social security disability, probate and estate matters.

So, I am one of the attorneys that will sue a landlord under premises liability if there is a case. What is frustrating to me is the fear of law suits against landlords that they will lose everything.

I have found at similar seminars (not yours) business consultants coincidentally selling limited liability companies and/or promoting their use as some kind of immunity or shield against law suits.

Protect Assets with Insurance

I advise property investor’s landlords to get insurance. If you have insurance, you really don’t need to worry about lawsuits since the insurance should defend you and indemnify you (pay) for any suit. The best asset protection is purchasing insurance.

Also, premises liability suits are some of the most difficult cases to take. Call around and ask for an attorney on a slip and fall case and you will be surprised by the lack of interest.

My advice to landlord property owners is to have a good insurance broker. Discuss with the insurance broker your specific concerns of a handy man being hurt and/or a tenant suit. It’s important that you are very specific at this meeting. Later if you are sued, you can bring this conversation up for coverage under reasonable expectations.

A landlord should have a business relationship with an insurance broker. All insurance needs such as liability, workers compensation, premises and an umbrella policy should be covered. If the selling agent states coverage is available, this should be confirmed in writing, such as providing a letter itemizing specific coverage.

Reasonable Expectations

Arizona had wonderful insurance law on reasonable expectations. If you go to an insurance broker for a specific example or insurable interest, the broker or insurance company can be bound. Under Arizona Law, reasonable expectations of a contracting party are to be enforced even if the written contract, such as an insurance policy/contract is contrary under the Darner decision/doctrine- 682 P.2nd 388 (Ariz., 1984).

There is a very famous landmark case in Arizona under reasonable expectations and insurance law. An auto broker went to his insurance broker requesting insurance on all of his vehicles. The broker wrote a small policy on one vehicle. The consumer was able to have coverage on all of his vehicles under the reasonable expectations.

It really should go without saying property investors need to be reasonable in their dealings. Underlying most premises liability issues, is notice. So, as a property owner if you are on notice of a dangerous condition, it must be fixed.

Notice of Dangers

The landlord obligation for premises safety may be summed up as Notice. For example, in Siddon’s, a four year old child was injured by a heavy door removed to allow access to the leased premises. The tenant asked the landlord to remove the door.

Another example is Shields, a landlord renting to a tenant repair shop that allowed pit bulls, that the landlord knew were dangerous.

I could go into some other areas such as fraudulent transfers, but that would be well beyond the scope of your inquiry. Perhaps in the future I could address this too for your readers.

John A. Gravina
Attorney at Law

LLCs and Protection for Rental Properties

Wednesday, April 30th, 2008

This article is in response to a comment on my last blog article.

I don‘t have my properties in an Limited Liability Company (LLC).

The issue is that unless you own your rental properties outright (that is, you still have a mortgage on it), you must get the consent of your lender to transfer the title from your name into an LLC without triggering the “due on sale” clause in your mortgage. A “due on sale” clause in a mortgage states that upon the sale or transfer of interest in the real estate the lender has the option of calling the loan due. If they called the loan, you would have to pay back the loan in full.

So, in general, LLCs are not an option for people like me who have mortgages on their rental properties.

For rental properties, I recommend a three track approach to protect yourself from lawsuits.

1.) The first layer of protection should be an insurance policy that protects your assets if someone sues you. If someone trips on a rug in one of your rental properties, and decides to try and hold you liable, your insurance company should defend you in court. If they don’t, you sue the insurance company. I have the standard $300,000 protection on each of my rental houses. Some people keep a $1 million umbrella policy. You will have to decide how much protection you need.

2. Second, provide a safe living environment for my tenants. I make sure everything works properly (toilets, ovens, coolers, etc.) and I remove hazards as quickly as I can (low hanging branches, electrical short circuits, etc.). If I get a call from a tenant for a legitimate repair I try to respond as quickly as possible. Usually that means sending my handyman over to make the repair.

3. Third, keep a low profile and take precautions when doing business with the public. You should have tenants mail monthly rental checks to a post office box instead of to your home residence. Have your phone number unlisted and use a pay-as-you-go cell phone. Because you own real estate, some people may view you as wealthy target, so look for ways to lower profile your profile.

I take the advice of J.J. Luna in his book How to Be Invisible when he says, “do not, as long as you live, ever again allow your real name to be coupled with your home address.”

Get Your Windshield Wipers Fixed Before it Rains

As a landlord, there are times when you have to make difficult decisions. Once I had to call the cops to remove a former tenant from one of my rental houses. I know, it never made sense to me either.

Had my personal information been commonly knowledge, the tenant could have tried to track me down to even the score. I didn’t have to worry about it since he never had that info, and it would take a lot of digging to find it. They may look for me, buy I’m not going to make it easy for them to find me.

Of course, that example is the exception. Most tenants are reasonable people. But, for the infrequent bad apple, we should have our defensive obstacles already in position before we need them.

Info on Terry’s Book

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