Understanding the Liabilities on Each Rental Property
If you’re a landlord, you understand the importance of making sure your rental property is safe and habitable for your tenant. By investing a small amount of time and energy into creating business entities for each of your rental properties, your big investments can be better protected. Take a look at our tips on asset protection by converting each property into a limited liability company (LLC).
Get Financing and Make the Real Estate Purchase through the LLC
It can be easy to forget that your first purchase of rental property is a business venture. It’s really important that you treat it as such from the start. One of the best ways to handle the purchase of new rental property is to seek legal advice in advance and purchase the property through the LLC.
Here’s why it’s so important to establish your LLC before making any rental property purchases:
Your holdings are at risk if you buy a rental property under your name. When closing on a property, you’re signing many documents. Many of these identify a financially responsible entity, and if that’s you instead of the LLC, your personal assets and finances may be at risk.
When the LLC holds the title to the property, you’re better protected. Create the LLC for your business prior to closing. It’s key for the LLC to purchase the real estate property. When the LLC owns the property, payouts for lawsuits that are filed against your rental property will be limited to the assets of that LLC.
Set Up a Separate LLC for Each of Your Rental Properties
Although not a necessity, it may be wise to create a separate LLC for each rental property as part of a larger strategy to insulate your other investments. Of course, you’ll need to be a responsible landlord, first and foremost.
If the unexpected happens, and one of your properties is entangled in a lawsuit, your other investments may be protected. Take a look at these critical reasons why setting up an individual LLC for each of your rental properties is a good idea:
Your personal property and assets are safer. Many new landlords can get caught up in the role of getting a space into shape for new tenants and forget that it’s a business. In doing so, they sometimes fail to protect their personal holdings from their new business ventures. Lawsuits resulting from landlord negligence can have a devastating impact on personal finances when these defenses aren’t in place. And unfortunately, a personal liability insurance policy may not be much help.
LLCs constrain liabilities to an individual property’s holdings and assets. Look at your rental properties like this: each of the rentals are your eggs and the baskets are individual LLCs. If you keep all your eggs in one basket, any mistake risks breaking them all. By setting up individual LLCs for each entity, you’re essentially giving each egg its own basket. And any breaks — or lawsuits against an individual property — that occur are in theory limited to a single basket, or LLC.
Reduce Liabilities and Professionally Manage Your Rental Property
One fundamental way to protect your business is to prevent small issues from turning into big problems. Here are some suggestions on how to manage your rental property professionally.
Focus on maintenance. By keeping your rental property in good repair and maintaining on-site equipment on a regular schedule, you’re off to a great start.
Be on-site frequently. Maintain the property regularly and be sure to remove any hazards from common areas. Manage stray trash around the mailboxes and be sure walkways are well-maintained.
Hire a property management company. With a lawyer’s sign-off on your operational agreement, you can outsource much of maintenance. Be aware that you may still be held liable for your property management group’s missteps. To prevent that, have your real estate attorney review your agreement and make sure that they consent to be held liable for damages resulting from their negligence.
Build Liability Protection into Your Lease Agreement
You may not be able to avoid all liabilities but you can fortify your lease agreement so that it offers some liability protections. Here are a few ways to bolster the liability protection in your lease:
Define conduct, rules and regulations. By defining expected behaviors and required actions that the tenant’s take in certain circumstances, you can protect your rental business. For instance, if you provide a pool for tenant use, prohibiting alcohol consumption in that area may be advisable. If a tenant should injure themselves while drinking there, your business would be protected from being held completely liable.
Define emergency issue notification protocols. Another way to prevent financial loss is to define protocols for tenants to follow during emergencies. Requiring them to immediately evacuate the rental when the fire alarm sounds, is one example. Landlords and property managers suffer financially when tenants suffer injuries because actions are not clearly laid out in the lease agreement.
Stay professional with problem tenants. If your tenant is up late, making noise and bothering other tenants, the remedy to that problem should be included in your lease. Define consequences for common nuisance behaviors in the terms of the agreement, and you may be able to take legal actions more quickly.
Why Your LLC Needs a Good Commercial Umbrella Liability Policy
By supplementing your existing business insurance, you can further protect the assets of your LLC. American Family’s Commercial Liability Umbrella Coverage gives you peace of mind when you need it. It’s a package of insurance protection that’s custom-built for the needs of business owners that require additional coverage above and beyond underlying policy limits.
As you’re planning your next real estate opportunity, remember to check in with our American Family Insurance agents. They’re trained to craft coverage that protects you best — so you can focus on growing that business.