In part 1 of this post I talked about the advantages and disadvantages to using a LLC for asset protection. In part 2 I’ll analyze umbrella policies, then provide recommendations.
Umbrella policy
An umbrella policy is an additional layer of protection on top of your existing insurance policies. It provides protection against a wide variety of perils across all of your assets.
Advantages of an umbrella policy
Provides protection beyond your rental properties
An umbrella policy doesn’t just augment your existing homeowner’s insurance policy – an umbrella policy provides protection in just about every area of your life. It provides protection beyond your personal residence and auto policies. It provides insurance against incidents that happen away from home (your dog bites somebody in a park). It provides protection against libel and slander. It protects you against a variety of threats to your finances that aren’t protected through other mechanisms. It even protects you against civil lawsuits for false arrest (I’m trying to imagine how this was a common enough occurrence that needed to be added to standard umbrella policies).
In short, an umbrella policy provides a very comprehensive layer of protection against threats you might not have any protection from today.
An umbrella policy is cheap
For all the additional protection that umbrella policies provide, they are surprisingly cheap. I was able to get a $1M umbrella policy for $250/year. As mentioned above, this provides additional protection not just for my 8 rental properties, but it provides protection in case of personal liability, liability for auto accidents, and others. For accounting purposes, not all of the $250 policy is for protection on my rental properties. I’d probably allocate $125 of the total cost towards protection on the rental properties and the other $125 towards the personal protection provided by the umbrella policy.
And not only is the actual policy cheap, but adding additional insurance is inexpensive and can be done at any time. I assumed that if the cost of $1M of protection is $250/year then $2M should be $500. I was wrong.
As a general rule, insurance is priced like this: cost of insurance = likelihood of a loss * cost of loss
Higher liabilities are exponentially less likely to occur. Only 13% of personal injury and liability judgements are for $1M or more. Even in case of death it’s unlikely that a judgement would be into the seven figures, and even if it is, it’s much more likely to be around $1M than $2M. This means that additional umbrella coverage is surprisingly inexpensive. I was quoted $100 year for an additional $1M in coverage (a total of $350/year for $2M in coverage). Coverage of $10M is available for around $1,000/year.
Umbrella policies are simple
I have one umbrella policy that covers my both personal and business (rental properties) liability. There is one check to write each year and one company to deal with. It’s the Platonic ideal of simplicity. I didn’t even need to meet with an adjuster – everything was handled over the phone.
One policy will cover all of my current rental properties plus any new properties I purchase. If I purchase additional properties I just have to notify my insurance company so they can add the new address to the list of covered properties, but there is no additional charge.
An umbrella policy covers all of your properties, regardless of location
A LLC is specific to the state it’s formed in. If you have a LLC formed in California and you want it to operate in Texas you’ll need to file paperwork (and pay fees) to register the LLC in Texas. If you’re going to file paperwork to allow your California LLC to operate in Texas you might as well just create a new LLC in Texas and have a bit more protection.
An umbrella policy will cover all of your rental properties throughout the US, regardless of what state they are in.
Disadvantages of an umbrella policy
You’ll need to increase your underlying policy amounts
Most umbrella policies require the underlying insurance policies to have relatively high liability limits. In my case I had to increase my homeowner’s insurance for the rental properties to $500k of liability insurance. My auto policy already provided sufficient coverage ($300k) but if your policy is lower than this you’ll need to increase your coverages.
Increasing my underlying insurance to the required minimum only cost about $10 per property per year. This is cheap, but obviously your additional cost (if any) will depend on your existing policy amounts. This is an additional cost that you’ll need to factor into your analysis.
Deductibles
As with any other insurance policy, umbrella policies have a deductible. And as with any other insurance, lower deductibles result in higher premiums and higher deductibles result in lower premiums.
My $1M policy has a $10k deductible. This means that if I am sued AND I am found liable AND the resulting liability exceeds my underlying policy (if any), then I am responsible for the first $10k of additional liability and my insurance company will pay the next $1M. I am then responsible for everything beyond that.
$10k is obviously a large deductible. I specifically chose a large deductible because it allowed me to purchase larger amounts of insurance for the same dollars. I see the umbrella policy as catastrophic insurance. I’m willing to take on $10k in liability if it means I can purchase an additional $500k in umbrella coverage.
You become a bigger target
As I mentioned in part 1 of this blog, the personal injury lawyers typically work on a contingency basis. They only take cases that they think they can win AND that have a potential payout large enough to compensate them for the risk of working on a contingency basis. Even if the lawyer has an open and shut, slam dunk case against you, they aren’t going to pursue a case if you’re broke. If you have a $1M umbrella policy you suddenly become an interesting target.
You’re going to get pissed when the insurance company settles
The reality is that only a small number of lawsuits actually go to trial. Lawsuits are expensive and risky. Even if you have all the facts on your side there’s still the possibility that you’ll lose. As a result, insurance companies tend to settle, even when the plaintiff has a ridiculously weak case. You have no input into this. Remember how I told you that the great thing about insurance is that the insurance company provides your legal defense? Well, the downside of that is that you don’t have any say in how the defense is handled. It’s likely that if you’re sued your insurance company will settle just to make the lawsuit go away. From a moral perspective this is going to piss you off. Somebody is going to sue you for a totally bogus reason and get paid tens of thousands of dollars.
Comparing LLCs and Umbrella Policies
Let’s run through a few scenarios to compare the protection provided by a LLC vs an umbrella policy. For all of these scenarios we’ll assume the following:
- Homeowner’s policy with $500,000 of liability coverage
- One of the following
- An umbrella policy with an additional $1,000,000 of coverage and a $10k deductible, or
- A LLC for each property where you are the sole owner.
Scenario 1
You own 5 properties, all in California (where I live). You have a LLC for each of the 5 properties. There are no accidents and nobody tries to sue you.
Total cost
- LLC – $4,000 (5 properties * $800/year/property for a LLC)
- Umbrella policy – $250 for a $1M umbrella policy with a $10k deductible
It’s pretty obvious than in a typical year you’ll pay a LOT more for a LLC than for an umbrella policy. This might make sense if a LLC offers significantly better protection, but as we’ll see below, that’s usually not the case.
Scenario 2
A tenant trips on a loose piece of carpet in the living room, falls, and breaks his arm. Total medical bills are $20,000. He’d previously notified you of the loose carpet but you hadn’t had a chance to fix it yet.
Your tenant sues you and your insurance company settles for $50,000.
LLC – no effect, as the coverage is provided by your rental dwelling insurance
Umbrella policy – no effect, as the coverage is provided by your rental dwelling insurance
Total financial loss
- LLC – $0
- Umbrella policy – $0
Scenario 3
You own an apartment building. Current equity in the apartment building is $300,000. One of your tenants has a party on the deck of his unit. The deck collapses, causing serious injury to 5 people. The most serious injury results in a broken leg, broken foot, and nerve damage in the victim’s knee. You are sued for $1.65M. Your rental dwelling insurance covers the first $500k of liability
LLC – your LLC is responsible for the remaining $1.15M of liability. This exceeds the value of the assets ($300,000) in the LLC. The plaintiffs take the $300,000 in equity in the LLC and the remaining $850,000 of the judgement is uncollectible.
Umbrella policy – you pay the $10k deductible. Your insurance pays the next $1M. You pay the remaining $140,000. Your total out-of-pocket liability is $150,000.
Total financial loss
- LLC – $300,000
- Umbrella policy – $150,000
You are clearly better off with the umbrella policy, as your loss is $150,000 vs $300,000. In addition, I would argue that the umbrella policy results in a better social outcome, as the plaintiffs receive money for medical payments, pain and suffering, loss of income, etc. With a LLC they only receive $800,00, which might not cover their losses.
(This scenario was taken from a real-life event at UC Santa Barbara in 2013)
Scenario 4
Same facts as scenario 2, except that your equity in the apartment building is $2M.
LLC – your LLC is responsible for the remaining $1.15M of liability. The value of the assets in the LLC is $2M. You’ll likely need to sell the property to pay the $1.15M judgement.
Umbrella policy – you pay the deductible ($10k). Your insurance pays the next $1M. You pay the remaining $140,000. Your total out-of-pocket liability is $150,000.
Total financial loss
- LLC – $1,150,000
- Umbrella policy – $150,000
Again you’re significantly better off with an umbrella policy
Scenario 5
You own 17 properties worth an average of $2M each, putting your total net worth at $34M. Each property is in its own LLC.
One of the properties is a dilapidated warehouse that’s used as an artists’ collective. This includes unpermitted residences and improvements. The lease owner occasionally holds unpermitted events, such as concerts, to help pay the rent. During one of these events a fire breaks out. Due to numerous fire code violations, the general state of disrepair of the property, and illegal improvements, the fire rips through the building, killing 36 people.
The families of the victims sue you and the lease owner for $25M judgement.
LLC – The $25M judgement exceeds the value of the $2M warehouse in the LLC. You’ll lose the warehouse and any insurance money paid to the LLC as a result of the fire. More importantly, you’ll likely be charged with criminal negligence. The $32M in other property outside of this LLC are safe, which will help support your family while you spend the next 20 years in jail.
Umbrella policy – you’re screwed. You’ll lose the $25M judgement plus spend the next 20 years in jail.
Total financial loss
- LLC – $2,000,000 (value of the property in the LLC holding the warehouse that burnt down)
- Umbrella policy – $25,000,000 (resulting in personal bankruptcy)
In this case you are significantly better off financially with the protection of the LLC.
(This scenario was loosely based off of the recent “Ghost Ship” warehouse fire in Oakland, CA)
Scenario 6
In addition to owning rental properties you have a personal finance blog. You write an article refuting an article on another blog and, as part of the rebuttal, say that the other blogger seems uninformed about the topic. The other blogger sues you for libel. The legal fees are $50k and you’re victorious in court.
LLC – No protection. You will need to pay for legal costs even though you win.
Umbrella policy – your umbrella policy covers legal costs to defend you. The deductible does not apply because you win the lawsuit and have no liability.
Total financial loss
- LLC – $50,000
- Umbrella policy – $0
Conclusion
The vast majority of individual investors are better off with an umbrella policy. The most likely scenario is that you’ll have no issues and no claims. In that case an umbrella policy is significantly cheaper than a LLC (see Scenario 1).
If you have lots of small properties (individual rental houses, for example) then the LLC fees will eat into your profits if you have a separate LLC per property. If you have multiple properties per LLC then you’re losing much of the protection of having a LLC in the first place.
If you have a small number of large or valuable properties (Scenario 4) then a LLC doesn’t help much because most of your net worth is probably already tied up in the property. Losing the property in a judgement will effectively wipe you out financially anyway.
The only scenario where having a LLC makes sense is if you have lots of expensive properties (Scenario 5). Putting each property in a LLC prevents a single large liability from wiping out your entire net worth.
Some people will advocate for a “belt and suspenders” approach of having both a LLC and a high amount of liability insurance. However, the cost of having both will significantly decrease the profitability of your properties, at which point you have to ask why you’re bothering to invest in real estate in the first place.
(Updated in 2018 to reflect the latest tax law changes)
Brilliant article! Thank you.
Thanks for the kind words. I wrote this article because I wished something like this was available when I was starting my real estate investing career!
Really informative summary. I appreciated the excellent comparison between LLCs and Umbrella Insurance. I have a 3 mill Umbrella Policy with American National for $540 per year. I agree with you that the Umbrella Policies are great value. You can easily increase them as your exposed net worth grows.
Yup – it’s hard to beat the value and protection you get from an umbrella policy. They are cheap, reliable, simple, and comprehensive.
Could you double check the numbers on Scenario 4 Umbrella Policy. It seems 2 million judgment minus 10k deductible minus 1 million in coverage should leave you with a bill of 990k or a total of 1 million down making the LLC the better option.
Great article, really appreciate learning this as I’m hoping to make a property purchase in the next couple of years.
In scenario 4 the amount of the judgement ($1.65M) is the same as in scenario 3. The difference is that your equity in the property is $2M in scenario 4 vs. $200k in scenario 3.
The math for the umbrella policy in scenario 4 is the same as in scenario 3.
I have had a much different experience with liability insurance. I own a couple of dozen rentals outside California and one in California, along with my personal residence. In the State Farm universe, I have to have two umbrella policies, one in California and one in Arizona. Each policy is on top of the rental insurance policies and the California policy sits on top of the homeowner’s policy as well. I had to raise the liability limits on the auto policies to conform with the California umbrella policy.
The cost for $5MM of coverage on each policy is not cheap. State Farm will not write over $5MM policies themselves. They have to go through commercial underwriting and are much more expensive. I would like to get a $10MM policy but not at the multi thousand dollar price estimated by State Farm.
LLC’s in California are expensive. In many cases, the corporate veil is easily pierced, especially when you are involved with managing the properties yourself in any capacity. I am not convinced they are worth the cost in my specific situation.
I had the same issue with State Farm insurance limit. I went with another insurer. There are a number of choices, but I went with ACE (a division of Chubb). I have a $10 million umbrella policy that costs about $1400 a year.
They key is to shop around. Just because one insurance company can’t meet your needs doesn’t mean that nobody can.
By the way, my insurance policy is a commercial policy. I was told that’s what I needed for the number of properties that would be covered.
Did you end buying both commercial and personal umbrella? Here is reply I got from State Farm agent for our out of state rentals (I’m like you in CA).
“Similar to many of our customers with out of state properties. We want to ensure that all of the policies are under your umbrella. Specifically, with State Farm if you have over 4 rental properties we categorize you as a business. So we would provide both a Personal Liability Umbrella and a Commercial Liability Umbrella. For California we want to set you up with auto, renters, and the two umbrellas. ”
Personal umbrella seems to be reasonably priced and on par with prices from article, however commercial umbrella seems to be very expensive, i.e. $3M=$750, $4M= $920.00, $5M=$1,080.00
Another consideration is to bump business liability on the Rental policies themselves, in my case change from $300k/$600k to $5M/$10M added just ~$90 per policy. It is definitely cheaper if one has less than 10 units.
Yes, we have a both commercial and personal umbrella policies. The business policies you have been quoted seem really expensive. I’d get some quotes from other insurance companies – maybe there’s just something going on with State Farm and your policies…?
My million dollar policy cost about $450. Two go to two million wasn’t close to double that, of which I’m probably going to do on the next renewal.
I might do the same. I know the general recommendation for an umbrella policy is to have enough protection to cover your net worth, but that seems excessive. I think the better way to decide how much coverage to carry is to determine how much liability you’re likely to incur and purchase that much coverage.
My Arizona umbrella is a commercial policy. Too many properties for an individual policy.
Who do you use and why?
I use State Farm, primarily because most of my other policies are through them and it made things easier. Their prices were also pretty competitive for the umbrella policy.
In state of Virginia, personal umbrella policy will cover only up to 4 rental properties. If you have more than four rental properties, you are required to have commercial umbrella for the rental properties and personal umbrella policy for personal liability (so you are having two umbrella policies). Is there company that offers an umbrella policy that covers both the personal and commercial excess liability?
A commercial umbrella policy provides both personal and commercial excess liability. Our commercial policy covers us for up to 10 named properties. I had to go to a commercial policy for the exact reason you stated – a personal policy would only cover up to 4 properties.
Very informative article. I have 7 properties. struggled with finding a insurance company that would cover all 7. What is the insurance company you use?
I use State Farm, but commercial umbrella policies are offered by a wide range of insurance companies.
The prices you mention for your State Farm umbrella policy is amazing. I’ll need to check them out. Trying to get a quote from Allstate who insures my personal and rentals for 1million is $750 and the 2million was approx. $1321. Seems a large difference.
I get the feeling that there are a number of insurance companies who don’t really want to write umbrella policies, so they make the cost high enough to dissuade people from actually purchasing the policies they offer. Definitely shop around – I saw big differences in policies from various companies.
Great article!
Absolutely incredible article, thank you so much.
I’m glad you found it useful. Please feel free to share and link to it.
Absolutely best article I have read this year regarding this topic! Every where they are pushing llc and I have been an advocate for unbrella from day one! This puts into words and examples what Ive been saying! Thank you, Thank You!
I wrote this article for exactly the reason you mentioned – everybody in real estate seems to automatically just recommend an LLC. And while an LLC isn’t necessarily a bad choice, it’s certainly not always the best choice. My goal was to do a deep dive analysis and determine if/when an LLC would be superior to an umbrella policy, and if/when an umbrella policy would be better.
Thanks for the kind words. This is exactly why I decided to start blogging in the first place – to help people!
Hi,
This was probably the most informative article I have found on the subject due to the examples. I have been struggling to figure out which approach to take in a sense over the past year while I have rounded out my rental portfolio. Now that it is complete and before I have to pay the yearly fee to Florida for the rentals I would like to figure out my long term strategy as what I was doing was “start-up strategy”. If you don’t, mind, I will give you my scenario and see what you might suggest.
I have 33 rentals in Florida. It costs me $150 per year to renew the LLCs for each. So that is $4950 a year I am paying and it is how I have them currently setup.
In addition, I carry 1M in liability insurance on each at $108 per year each. So that is $3,564 per year I am paying.
Thus this $8,500 a year for LLC and 1M liability protection. I want to evaluate if there is a better way to protect myself and my assets.
I think you have to take other things into consideration. Each property for argument’s sake is worth $100K. So each being in their own LLC limits what could be taken from that LLC to a certain extent ($1M in insurance and $100K asset) absent piercing the LLC.
My net worth is probably $6M. So I do have a worry of the veil being pierced because I don’t get to something quick enough, I fix something that causes an issue or one of my handymen cause and issue.
So on a personal level, I do have a 2M umbrella policy which I think is costing me about $800 a year. I am going to check into it, but I don’t think it covers the rentals. Many of the insurance companies I have spoke with don’t want to touch this many rentals with a 10 foot pole. I will check with State Farm as I can’t recall if I checked with them as I made about a dozen calls previously.
I am being offered a commercial umbrella policy that will cover all my rentals with the following:
$1,000,000: $858
$2,000,000: $1,464
$3,000,000: $2,070
$4,000,000: $2,676
$5,000,000: $3,282
Now one of your statements that this can eat up your profits quickly…well, I rather sleep well at night and have a couple grand less a year than lose it all. If I make an extra few grand a year by saving on insurance or LLCs….well, it will not change my lifestyle one bit. That said, I don’t want to throw money away either as it could go to help someone. So there is a balance.
One last note, I have toyed with the idea of maybe having 6 LLCs to sort of limit liability fees and upping the umbrella. But I would really welcome another person’s perspective as all the insurance agents are scared to provide any guidance and I don’t know anyone else in this same boat or who really understands it.
Thanks
BB
Thanks for the kind words.
First, only you can decide what level of protection you’re comfortable with. There is always a tradeoff between cost and protection. And, no matter how much money you spend, there will always be some risk. Neither an LLC or umbrella policy will protect you against going to jail for criminal negligence, etc.
Second, you’re almost certainly correct that your personal umbrella policy does not cover your rentals. If you have 33 rentals then your rentals will almost certainly be considered a business (regardless of the actual legal entity through which you hold the rentals), and a personal umbrella policy doesn’t cover liability incurred in a business.
Third, the amount of liability protection that’s appropriate depends in part on the properties. Are these 33 properties single family residences (SFRs), duplexes, or 50 unit apartment buildings? My guess is that they are SFRs, as you have a $6M net worth and 33 properties, so even if all of your net worth was from your rentals (which I’m sure is NOT the case), that would be $181k of equity per property.
Fourth, It’s generally more economical to have a single high limit liability policy then lots of little policies. I think it’s also safer – having 33 policies of $1M is less safe than a single $5M policy, as the 33 policies still only provide up to $1M of protection for each house, whereas the single $5M policy provides $5M of coverage for ALL your properties. Some people will say the 33 policies is preferable because it’s possible that if you’re hit with a claim your insurer will cancel your policy, but the reality is that insurers share information, and if you’re hit with a lawsuit all of your policies for other properties will be reevaluated by your insurer.
Finally, I absolutely agree that you should select the balance of cost and coverage that will let you sleep at night. The intent of this article is to give you the information to make that choice for yourself. However, given the limited information you’ve provided, I would think that a single $5M policy is going to provide more protection than the 33 $1M policies you currently have, and it will likely do so at approximately the same cost.
As for the protection that LLCs provide – well, let’s just say I’m skeptical that the average individual real estate investor is going to enjoy much protection from one.
I am writing to say thank you for putting together this article. I have been parsing information for a week and talking to lawyers and accountants who were not nearly as helpful as this article. The more I dug into the challenges of setting up LLCs, problems with the banks holding the mortgages, etc. the more inclined I was towards the well-insured route instead and this information did the trick. Thanks again!
I made the decision a long time ago to use an umbrella policy instead of LLCs, but lately I was considering revisiting LLCs. I am glad you reminded me that I should probably stay the course.
And in Part I of this series I laughed about your reference to study of doctors who are jerks. I had a torts professor in law school who cited the same study and it’s one of the few things I remember from a law school lecture. I actually included the same analogy in a blog post I wrote a few months ago about dealing with tenant issues, ha ha.
Anyway, great stuff, I’m subscribing.
Yeah, the reality is that LLCs sound like they provide a lot more protection than they actually do. It’s just too easy to subvert the protection they claim to provide.
The Hartford (through AARP) is my personal insurance provider (in CA) for my auto, primary residence and Calif. rental property w/ landlord coverage. I recently asked them for an Unbrella quote ($610/yr for $5M) and it was competitive. However, they said they do not cover rentals under the Umbrella. Thus my problem. It seems personal umbrella policies are tied to your auto policy. So to protect my financial interests (and get a decent bundled rate) I would have to change everything to another carrier that can accommodate all my needs. Does this sound right or is The Hartford wrong? I asked about their commercial Umbrella policy, but they don’t cover residential property. Ugh! Is there someone that will sell you a personal umbrella for my 1 rental and not require also carrying my auto and/or homeowners?
It’s been my experience that different insurance companies provide different policy coverage for umbrella policies. In general you’re going to need a commercial umbrella policy to cover you if you have more than 4 rental properties. My personal umbrella policy would cover my primary residence, cars, and up to 4 rental properties.
Check around with other insurance companies – somebody will offer an umbrella policy that will cover your rental property plus your house and autos.
Thank you for the wealth of information, as it has proven extremely informative. I am just about to dive into investment properties, and was having a rather tough time researching whether or not to form an LLC for asset protection, and this article seems to sum it up (I will be small-fries at first anyway, and after reading this article it seems LLC makes no sense). I will be employing the umbrella policy method for sure, so again, thank you very much for the thorough review.
My only remaining question for you is this:
I live in California (unfortunately), and it may seem logical to form an LLC (taxed as an S corp of course) based solely on taxation purposes. I do not plan on purchasing investment properties here, as California is heavily tenant-friendly, but was wondering your thoughts if you happened to also live in California.
Either way, thanks again for the wealth of information!
I do live in California, and all of our rental properties are out of state. If, after reviewing this article, you have decided that you need an LLC then I’d urge you to create the LLC in whatever state your rentals are in. LLCs are especially expensive in CA, and your LLC will need to cross-register in another state if doing business in that state, which means there’s no advantage to having an LLC in CA if your properties are out of state. As for taxation – you’ll need to file taxes in whatever state your rentals are in (since that’s where you’re earning your rental income). The exception is if your rentals are in a state with no state income tax (TX, for example).
Hello all. As I have been digging into this exact issue for some time now, I’m so glad to have come across this great article. Thank you so much.
My situation is similar to a few of you. I live in CA; however, own properties in MI. The great state of CA has a far reaching law that puts CA residents on the hook for the $800/yr LLC tax even if your LLC is created out of state.
https://www.ftb.ca.gov/forms/misc/3556.shtml
About halfway down the webpage, you can read example #1 and on. I have consulted a few lawyers and read a plethora of online forums/threads and cannot locate any information to support CA residents not being considered as “doing business” in the eyes of the Franchise Tax Board.
Only 1 lawyer has disagreed with my findings, but could not support his opinion too well. Does anyone have any experience or knowledge regarding this information?
I am 90% leaning toward an umbrella, but still would like to confirm my findings. Plus, maybe down the line I’d like to wear suspenders and a belt.
Thanks y’all.
Mark-
Since my original posting in February of last year, I have acquired two SFH’s in Indiana (unfortunately, the increases in home prices there have made the margins at this time too unfavorable to acquire any more, but that will hopefully change soon, as the market has gone flat). I decided against the LLC largely in part due to the information you shared above from Cali’s “Franchise Rape Board”. I found the only way around having to pay the California fee as well would be if UPS Mailbox Service was available in the same state of your rentals. This would afford you a physical mailing address (can’t use PO Box for LLC), 24 hour access to your mail, mail forwarding, and they also accept packages on your behalf. Assuming they wouldn’t mind, you could also just have your property manager/relative/friend or whoever you know in the state swing by it once a week to pick up your mail. This would allow you to subvert using a California address as the LLC’s tax filing address. Of course, this all assumes you even decided an LLC is even worth in in the first place (you mentioned a 10% uncertainty regarding LLC vs umbrella). My personal evaluation was that it wasn’t worth the hassle.
Hope this helped!
JV
(First, I assume you meant to say “Franchise Rate Board” – please let me know if you’d like me to edit your comment appropriately)
Another option is to pay for somebody (such as an attorney) to act as your local agent in the state where you’d like to incorporate your LLC.
The attorney is another viable option, provided the attorney fees are not exponentially higher than the mailbox service option.
As for before, it was a play on words due to California’s excessively high taxes and fees on just about everything. It was not my intention to offend, so If you or others were offended, please excuse it, or delete it (your choice, as it is your site).
Thanks for the clarification.
I never censor comments on my website. The only thing I delete are spam comments.
Thanks all for your replies. Setting up the Michigan LLCs are simple and affordable. My brother lives there and is my property manager and can easily act as my resident agent.
The main issue I’m attempting to clarify is even if I implement the measures you all have discussed, will I still be on the hook to CA for the $800 per LLC?
I’m assuming the answer can be argued as yes even with the the papertrail placing the LLCs under a registered agent or attorney.
The reason I’m digging deep is because I recall a question on the CA IRS tax form asking if any properties have been placed under an LLC. So, I do not know if placing the LLC under a registered agent or attorney legally places me off the hook from answering yes to that question.
Any thoughts? Can anyone confirm I’m correct or not about that IRS question?
Thanks again.
Well, you should probably consult an attorney for the answer to this question, but I can tell you that the California Tax Board’s guidance is that an LLC needs to pay a fee if it is “doing business” in CA. “Doing business” is broadly defined, and appears to include having a managing partner living in CA. That would seem to indicate that you’d need to pay the CA licensing fee if you live in CA, even if the property owned by the LLC is in another state.
Hello, I live in CA as well and have an out of state property. I was also thinking I had to go the LLC route as much as I did not want to living in CA and also reading that even though I live in CA and my prop out of state I had to file foreign LLC in CA and LLC in the state my prop is in. I prefer to go the umbrella route as currently I only have 1 remtal property. I like the idea of the simplicity of the umbrella vs creating and maintaining an LLC. What is your advice on this scenario.
An LLC can be awfully expensive for a single property, especially if that property is a single-family residence. It might make sense if you have a single property but the property is a 30 unit apartment complex or something like that.
I don’t know enough about your situation to provide advice to you, but for most people in your situation my advice is that an umbrella policy will provide the protection you need at a significantly lower price.
Do you recommend any insurance companies to get umbrella insurance for my properties under my LLC?
I have 2 LLC’s, and 3 properties that are commercial properties. Any specific insurance company you recommend (or recommend to avoid)?
I don’t have a lot of experience with specific companies. We’ve used Geico and Allstate and had fine experiences with both.
Excellent article! I was searching for ways to avoid an LLC and your article just helped us greatly.
My spouse and I live in CA and exploring purchasing our first rental property in FL (we’d like to live there eventually). We’re going to get a trust this year (first time) and wanted to know what advice you have when it comes to putting the property under a trust’s name. For example, should the rental property be under a 2nd trust name or the same trust name as the one we’re going to have for our primary residence?
The easiest way to put a property in a trust is to buy it for the trust initially. This is easiest if you’re paying cash. Otherwise, you’ll need to get the mortgage company’s approval to have the title in the trust’s name but the mortgage in your name (lenders want the entity who owns the property to be the one that is responsible for the mortgage).
But to be clear, having a trust offers no “protection” in the way that a LLC might. That’s not the point of a trust. Unless you’re in the super rich class there’s rarely a reason to have more than one trust. For normal people a trust is primarily to ensure your assets are distributed according to your wishes.
Outstanding information! Great job.
Regarding Scenario 5. I think the owner’s personal interest in the other LLCs are also for grabs if sued personally. Hence, his person can lose the other LLCs and the associated holdings.
What do you think about that possibility?
Thanks,
It would really depend on if you’re found personally liable or not. If the plaintiffs were able to “pierce the veil”, then you’d lose all the protections of the LLC. They’d have to show negligence or intent (which might be possible given the facts of the scenario).
If you’re found personally liable then all of your assets are potentially at risk. In that case the only protection would have been if you’d set up a trust. Stay tuned for a similar article about will and trusts…
Having both an LLC and a umbrella policy is sometimes like wearing a belt and suspenders at the same time. You don’t need both. I prefer wearing the belt.
I agree that you rarely need both. That’s why I wrote this article – to help my readers decide which is most appropriate for their situation.
I have an LLC mostly because the rental properties are purchased via a partnership with my brother and I. Does all the same logic above apply?
I am thinking it would be advantageous to mortgage the properties in the LLC (leaving less equity) and also having an Umbrella as a catch all. Good strategy?
Yes, everything in this article applies, regardless of if you own the entire property or just a part of it.
One wrinkle with an LLC is that you’ll need the umbrella policy to be in your LLC’s name so it’s protected.
You’ll almost certainly be unable to actually purchase your properties in the name of the LLC, as a new LLC has no income/profit history. Your lender will require you and your brother to personally guarantee the loan.
Great article, folks blindly advocate for the LLC. Umbrella has clear advantages for most everyday investors…..like me.. Thanks for taking the time! Much appreciated
It’s surprising how much misinformation is out there. People hear about an LLC and think it’s the only (or at least best) solution. When I was trying to decide if it made sense to create an LLC or just buy an umbrella policy I kept hearing people advise LLCs, but nobody could articulate why, and that’s what lead me to do the research and write this article.
Do you still get the same tax benefits with having the properties under and Umbrella policy vs and LLC? Write offs and depreciation?
Yes, those tax deductions are available whether you hold as a sole proprietor or as an LLC.
Such a good read- clear and straightforward unlike everything else out there…
I live in CA as well, and have 5 SFH rental properties out of state and am looking to buy 1-2 more. Was close to putting them all into separate LLC’s, per legal and tax advice, and am so glad I read your article first… Thank you!
Questions: Is it still best to form one LLC to “house” all the current and future properties here in CA, while having the umbrella policy in place for liability? Or best to insure under yourself personally? For doing business is it may be better having the commercial entity/name for banking, taxes, accounting, and collecting rent checks (I am aware of the $800 California LLC fee).
Thanks again- great stuff!!!
I’m not sure I totally understand your question, but if you’re asking if the umbrella policy should cover you or the LLC, the answer is that you want it to cover you. After all, if you’re a small real estate investor and have purchased a property with a mortgage then you probably don’t have a ton of assets (i.e. equity) in the LLC to protect.
As to whether you should form a separate LLC for each property or if you should form one LLC for all of the properties, that’s a decision you need to make after analyzing the cost/benefit tradeoffs. The cost of each LLC in CA is expensive enough that you’d need substantial assets and income to justify a separate LLC for each property.
Thank you so much for this enlightening article. I recently created an LLC in New York before coming across your article. I would not have done this had I read your article earlier.
In New York, I own a total of two properties (mortgages fully paid): a family home where I lived for many years, and a lot that has been rented out commercially for auto-wrecking related businesses. I have moved to live with my daughter in her house in California, so I am planning to rent out the house in NY I used to live in. I do not have other properties nor vehicles (I no longer drive).
So here is my question: At this point, because I already created the LLC, would it be a good idea to transfer the deed of the commercial property into the LLC and purchase insurance for the family house? What type of insurance would you recommend for the latter (I understand from your article that I need “landlord insurance” for the lot)? Because I live with my daughter in her house, I do not have a personal home to ensure, and do not know if insurance companies would issue an umbrella policy without a homeowner’s insurance policy.
Thanks again for sharing your knowledge with all!
If you’ve already created the LLC there’s really no reason not to transfer the properties into it. If you also have an umbrella policy then you’re just taking a belt and suspenders approach.
You should have an umbrella policy that covers both your family home and your commercial property, as you’d have potential liability for accidents/injuries that happen on either site. However, you WILL need an underlying homeowner’s insurance policy – in fact, most umbrella policies have minimum liability coverage that the underlying auto and property insurance must provide.
Would an umbrella LLC created in one of the three states that offer anonymity, which holds all the individual property LLC’s, help alleviate some of the possible ramifications of a lawsuit?
No, it won’t. In the event of a lawsuit the plaintiff will get a court order to reveal the identities of the owners.
The only advantage anonymity would provide is that a member of the public wouldn’t know that you own the real estate property, so it’s a way to prevent people from knowing your true net worth.
Hello – This is hands-down one of the best articles I have read in terms of clarity around pros and cons for each, different scenarios, costs, etc., and above all based on your personal experience as well. I have to agree with all other bloggers here that this is an extremely useful article. Thank you so much for sharing.
Now coming to my personal situation – I am investing in my FIRST investment property a 6 plex unit worth about a $1 Million. Obviously whether it is the internet or your broker the first thing everyone will tell you is that it is better to get an LLC. I am not convinced and have been reading and researching until I came across your article. My protection considerations are the following: I have almost $3M in personal assets (outside of this $1M property), due to my down-payment, aggressive payoff strategy, and location I intend to build significant equity in this property really quick, I intend to invest in 2 to 3 other rental properties in the next year or two, I estimate my personal liability (outside of any real estate investments) to grow to about $5 M over a few years. That said am I not better off just getting an umbrella insurance policy for a couple of million dollars and increasing the coverage as my total net worth increases? FYI – I live in a state where the initial set up cost for each LLC is about $150 and the annual filing fees is about $100 per year (but who knows about the future as States are going broke).
Also with regards to LLC’s almost all articles give insights into moving a property to an LLC. What about the reverse? What if you have one or multiple LLC’s (all single-owner with you as the owner) and you realize it is a big mistake and want to transfer the properties out of the LLC and into your personal name?
Another related question – As a landlord lets say I stipulate in the lease agreement that the tenant agrees to get their respective tenant insurance for say $100K as a condition of entering this lease. The tenant signs the lease but fails to get their tenant insurance. Does this mean the landlord (me) is off the hook as they have breached a contractual term under the lease?
And ONE more related question – What are you thoughts on having a month-to-month rental agreement vs. a one-year rental lease? My question is obviously from the perspective of a landlord and in a State that is tenant-friendly, This is another area of so much debate that any perspective from you or other bloggers here will be most helpful.
I cannot thank you enough for the wonderful article and responses and comments to other bloggers. Will truly appreciate your insights.
What is the best way to remain anonymous to the extent possible if you are investing in a rental property without creating a LLC? My question is not about ABSOLUTE anonymity as I understand in the event of a lawsuit, claim, lien or someone taking the extra step of spending a few dollars on public records, one’s identity will be revealed. My question is about an INITIAL and BASIC level of anonymity where-in someone just curious about how many properties you own, or just interested in knowing more about my properties cannot just see my name and address similar to finding me on LinkedIn or any social media.
Name – Can I use my legal name and an alias name/aka (also known as) on my title deed with my alias name showing up on instead my legal name? (I understand my legal name will show-up as the signatory of the title deed but for initial-level of anonymity).
Address – Can I create and use a PO Box for recording of my title deed? If I do so will my current full home address not be displayed? If I use a PO Box what happens if after a few years I decide to discontinue the use of the PO Box?
Appreciate your insights as a landlord and someone who I am sure has had similar concerns? Thanks.
First, let’s be clear – it’s impossible to be completely anonymous when it comes to property ownership. Ownership of real estate and the associated transactions are considered public records. Finding a property owner used to require a trip to the public records department at your local courthouse. Now, with everything online, you don’t even need to leave your house to get that information.
That said, there are ways to make it harder for a tenant (or anybody else) to find you.
1. The first level of defense is to use a PO Box for all of your real-estate related communication. When you open your business accounts at your bank (you DO use a separate business account for your real estate investments/transactions…right?) use the PO Box as the business address. You can even use a private service that will open all mail, scan it, and email to you so you never even have to go into the post office to pick up your mail.
2. Use a phone forwarding service (like Google Voice) so you have a separate phone number that forwards to your cell phone. This lets you screen calls, have them automatically sent to voicemail, etc. and prevents anybody from using your real number to find you.
3. LLCs don’t actually provide much anonymity, as you’ll have to put your name (or another founding member of the LLC) on the LLC registration documents. This means that anybody can just look up the LLC and get your name and contact info.
4. Property management companies can help protect you by being the first (and hopefully only) point of contact with tenants. Again, this won’t really protect you if somebody wants to find the owner of a property.
The rules for what you can use for a deed (physical address vs. PO) vary by state, but in general you can use a PO Box on the title deed. That address is mostly used so the local government knows where to send the tax bill, so a PO Box is usually just fine with them.
Hello – Thanks for the response. As always great words of wisdom. I did not think about using a virtual phone like Google Voice and it makes complete sense. I only less than 10 doors at the moment and do not use a property management company. My tenants know me as one of the owners, which is fine.
I maintain a separate personal account for all my real estate transactions including receiving rent, expenses, etc. The personal account has my complete street address. Would you suggest that I open a separate bank account using the PO Box and does it have to be a business account versus a personal account? Thanks.
My advice would be to never give your address to the tenants. If they know you as the owner then give them your PO Box for all correspondence. You don’t want anybody showing up at your house if there’s a disagreement about rent, repairs, etc. In the future I’d introduce yourself by saying “I manage these properties”, because that is completely true. I’ve heard of some investors introducing themselves by saying “I’m the property manager”, which is true but a bit misleading. Even worse is when some investors will tell tenants something like, “I know that the owner doesn’t usually go for that, but I’ll need to ask him to be sure”. This is just plain misleading. Don’t do that.
I’d have a separate account for your real estate investing. It doesn’t need to be a business account, and the address on the account doesn’t matter. The main reason to have a separate account is to make the accounting easier.
Thanks so much for the extremely thoughtful and insightful responses. Very helpful!
I am reposting this comment as I accidently posted it a response to some other unrelated comments from a fellow blogger.
Hello – This is hands-down one of the best articles I have read in terms of clarity around pros and cons for each, different scenarios, costs, etc., and above all based on your personal experience as well. I have to agree with all other bloggers here that this is an extremely useful article. Thank you so much for sharing.
Now coming to my personal situation – I am investing in my FIRST investment property a 6 plex unit worth about a $1 Million. Obviously whether it is the internet or your broker the first thing everyone will tell you is that it is better to get an LLC. I am not convinced and have been reading and researching until I came across your article. My protection considerations are the following: I have almost $3M in personal assets (outside of this $1M property), due to my down-payment, aggressive payoff strategy, and location I intend to build significant equity in this property really quick, I intend to invest in 2 to 3 other rental properties in the next year or two, I estimate my personal liability (outside of any real estate investments) to grow to about $5 M over a few years. That said am I not better off just getting an umbrella insurance policy for a couple of million dollars and increasing the coverage as my total net worth increases? FYI – I live in a state where the initial set up cost for each LLC is about $150 and the annual filing fees is about $100 per year (but who knows about the future as States are going broke).
Also with regards to LLC’s almost all articles give insights into moving a property to an LLC. What about the reverse? What if you have one or multiple LLC’s (all single-owner with you as the owner) and you realize it is a big mistake and want to transfer the properties out of the LLC and into your personal name?
Another related question – As a landlord lets say I stipulate in the lease agreement that the tenant agrees to get their respective tenant insurance for say $100K as a condition of entering this lease. The tenant signs the lease but fails to get their tenant insurance. Does this mean the landlord (me) is off the hook as they have breached a contractual term under the lease?
And ONE more related question – What are you thoughts on having a month-to-month rental agreement vs. a one-year rental lease? My question is obviously from the perspective of a landlord and in a State that is tenant-friendly, This is another area of so much debate that any perspective from you or other bloggers here will be most helpful.
I cannot thank you enough for the wonderful article and responses and comments to other bloggers. Will truly appreciate your insights.
It’s not clear from your email if you’re saying that you expect your real estate holdings to be worth $5M or if you are saying your personal net worth (exclusive of your real estate holdings) will be $5M.
If you expect your real estate equity to soon be $5M then I’d probably go ahead and pay the money to set up an LLC. $250 for the first year and $150 in subsequent years is a very small percentage of your real estate equity. You’ll also need to consider if you’d want to set up separate LLCs for each of the properties you’ll plan on owning.
However, I think it’s more likely that you’re saying that you’ll have a net worth of $5M, as the property you’re buying is worth $1M and you mention a down payment, which means at least some of the cost of the property is being financed. In that case I think a LLC is much less attractive. But again, you live in a state where LLCs are pretty cheap (although you also have to factor in the cost of the additional tax forms and hassle factor), so maybe it would still be worth it.
Moving your property from an LLC to private ownership will require a quitclaim deed, and you’ll want to talk to an accountant about the potential tax implications. However, as I mentioned in the article, if there’s a mortgage on the property you’ll need to get the permission of your lender before you can change the ownership on the property.
You’ll also want to talk to an attorney regarding your question about tenant insurance. It’s unlikely that your state has a law regarding this specific situation, so it would likely be litigated in court. However, the fact that the tenant has violated the terms of the lease would absolutely help you in this situation, and the best case scenario is that it dissuades the tenant from suing you in the first place.
Regarding lease length – I think that for most people there’s not much of a benefit to a 1-year lease, especially in a tenant-friendly state. This is because a 1-year lease supposedly binds both parties, but in reality a contract only binds a party if the penalty for breaking the contract can harm/affect the party. For example, if you’re broke and you sign a NDA that includes a penalty of $1M for breaking the NDA…well, breaking that contract isn’t going to do much to you.
Statistically, renters/tenants have lower net worth than owners. This means that, on average, they have less to lose. If you have a 12-month lease and the tenant moves out after 10 months and refuses to pay, you’ll have to pay the time and money to sue the tenant in court. Then, once you’ve gotten the judgement in your favor (which you likely will), you have to find a way to collect. If the tenant moves to a different state it’s going to be hard to find them.
YOU, on the other hand, are easy to find. If you break the terms of the lease, a lien can be placed on the rental property if you refuse to pay whatever the penalty is for breaking the lease.
The good news is that most tenants are good people and will try to abide by the terms of whatever agreement they sign. The advantage of a 1-year lease is that it makes the intentions known on both sides – you intend to let the tenant live there for a year and they intend to stay there. Plus, 1-year leases are the standard, and there’s a bit of a stigma associated with a property that only offers month-to-month leases.
Personally, I do 1-year leases with all of my tenants. I’ve done 2-year leases, in which case you should have a rent escalation for the second year.
I had meant to say my net worth becomes $5M exclusive of the real estate property I am holding.
Thanks so much for the extremely thoughtful and insightful responses. Very helpful!
Hello – Can you suggest a good insurance company for umbrella policy? I contacted my car insurance company and they declined to provide umbrella policy for a building with over 4 units. Thanks.
It’s usually easiest to use the same insurance company for all of your properties and the umbrella policy. There are few reasons for this. First, you’ll often get a discount for putting all your policies under one roof. The second is that it’s nice to have a single point of contact for billing and claim issues. The final reason is that when you get an umbrella policy for multiple rental properties you’ll be asked to provide a loss report, a copy of the existing insurance on the rental, and possibly pictures. If the underlying properties are already covered by the same company that’s doing the umbrella policy then they’ll be able to pull everything from their internal records rather than requiring you to provide the info every year.
I personally use State Farm, as they were one of the few insurers that would issue a commercial umbrella policy (required if you have 5+ rental properties).
Hello – Thanks again for the wonderful information in your website. Three tax questions relating to investment property:
1. A multi-family residential building with 6 units (more than 4 units) is generally considered “commercial” property for financing purposes. However, for determining the appropriate depreciation duration (given that the entire building is residential), will it be considered RESIDENTIAL subject to 27.5 years of depreciation or COMMERCIAL subject to 39 years of depreciation?
2. Is rental investment property indexed for inflation when computing cost basis for tax purposes, when sold?
3. Say I purchased a plot of land for $15000 (assessed value by the town for property tax purposes is $5,000). I construct a rental building and my cost of construction is $45,000. So my total cost is $60,000 (land 25% + building 75%). Let’s say the town assesses the value for property taxes as $40,000. Will the town in this case it re-adjust the land to building value using this 25-75% ratio as $10,000 for land and $30,000 for building OR will the assessed value of the land remain at $5,000 forever even after the new assessment following the construction of the building?
Appreciate the insights.
1. The general way to determine residential vs. commercial is if the primary intent of the property is to house people. It doesn’t matter if it’s being rented or lived in by the owner. A multi-family residential building would be considered residential for tax purposes. Commercial buildings would be buildings whose primary purpose is to house a business (retail store, office building, etc.)
One more thing to remember about depreciation – you only depreciate the improvements on a property. You do not depreciate the land. So if you buy the $1M residential property and the value of the building is $800,000 and the land is worth $200,000, then you’d depreciate the $800,000 building over 27.5 years.
2. There is no adjustment for inflation when computing tax basis. You do get to increase your basis by the value of any improvements you’ve made.
3. Determining the value of land vs. improvements is often tricky, and is essentially a negotiation between you and the IRS. You can use various ways to determine the values, including tax assessments, value of improvements, etc. It’s obviously in the best interest of the investor to make the value of the improvements as high as possible (to maximize depreciation), and the IRS would prefer that the value of the improvements be as low as possible (to maximize taxes).
You’d want to talk to an accountant, but in this case I think you’d have a very good case that the improvements are worth $45K, because you’d have receipts showing that it cost that much to build the improvements.
Thanks so much for the extremely thoughtful and insightful responses. Very helpful!
Hi,
Thanks for the informative article. I am a beginner in real estate investments, just trying to understand the jargon. Couple of related questions-
When you say “equity in the apartment”, does it mean “down payment + principal amount paid off from monthly mortgage payments “?
If yes, is there any way to reduce the LLC’s equity in the apartment (from 100%) after the mortgage is fully paid off?
That definition is close. Equity = value of the property – loan.
So in your case your definition should be:
Equity = down payment + principal amount paid off from monthly mortgage payments + **property appreciation**
If you own the property your equity will be 100%, but the actual value of equity could decrease if the value of the property decreases. Here’s an example: you own the property free and clear and it’s currently worth $500,000. Next year the value drops to $400,000. You still own 100% of the property, but your equity has dropped 20% from $500,000 to $400,000.
I appreciate your article and it makes alot of sense. Does most of your advice still stand 4 yrs later? I think i got scammed into a complicated LLC structure w/ real estate trusts. I am closing on my 2nd out-of-state rental and feel uneasy about the LLC as a new investor. The umbrella policy seems easier/cleaner and much more cost-effective. Do you offer consulting services? Thanks.
I’m actually continually updating this webpage as tax laws and/or court cases change the landscape. The good news is that the advice in this article absolutely still applies today.
I’ll contact you directly regarding my consulting services.
Hi! Great article!
I recently bought my first personal home but now my work is moving me overseas as borders are opening up. I don’t have much equity in the house since I just bought it. I also don’t have a very high net worth. I’d like to keep the house to rent out while I’m gone (could be a few years). How do LLCs and umbrella policies compare for situations like mine? One single house, and low net worth. The property manager we would use is recommending LLC, but an increasing liability insurance seems more realistic, assuming it would cover me if I’m sued.
Also, since I’m moving overseas, I won’t have an auto policy or primary residence in the US, so the insurance company said they could only find a company to write an excess liability policy. They said it “provides additional coverage after an underlying liability policy has reached its limit. It covers any claims that would have been covered in the underlying policy. However, it excludes any claims the underlying policy did not cover.” Do you think this would be fine instead of a normal umbrella policy?
You’ll still need a regular insurance policy on the house, whether you’re living in it or not. If you’re renting it out you’ll want a different (and cheaper) policy that covers the structure and provides liability insurance but doesn’t cover the contents of the house (your tenant will need a renter’s policy for that). The homeowner’s policy will include some level of liability insurance, but in my experience, an umbrella policy covers additional risks that a homeowner’s policy does not. This appears to be different than the “excess liability” policy you mention. Frankly, I don’t see the value of the excess liability policy, as it might just be less expensive to increase the liability protection for the base insurance policy.
I have a hard time seeing a scenario where a LLC makes sense for you.
Thanks for your reply. I’d definitely get a landlord type policy, and would like to add on top of that. The main issue I’m facing is that since we will be overseas, I won’t have an auto policy, so many companies won’t give me an umbrella policy. My current insurance company also said that the most I can increase liability to would be $500k. I’d like to be at $1-2 million total. Options I’m considering after reaching out to other providers.
1. Keep current insurance broker. Landlord policy at $500k and add $1 million excess liability policy. The policies would be with different companies. Not sure your thoughts on this?
2. At a different insurance broker, have landlord policy, non-owner auto policy, and their umbrella policy all with the same insurance company (Safeco).
3. State Farm, landlord policy with $1 million liability and $1 million commercial umbrella. Is the commercial umbrella fine to use even if the property is just in my name (not an LLC)?
What do you think about these options?
First, I think you need to figure out how much insurance you actually need. How much is the property worth and what’s your approximate net worth? If your net worth is relatively low and the property value is relatively low, then you realistically have a relatively low chance of being sued. You say you want to have $1M – $1.5M in liability insurance. How did you arrive at that number?
At a high level, an umbrella policy > excess liability policy, so it’s probably better to go with a solution (like the Safeco option you mentioned) if the pricing is comparable. There’s no issue with having separate companies for the different policies. It doesn’t matter if the property is in your name or help by an LLC/corporation/etc. What matters is that the policy lists the property as being insured and lists you at the beneficiary.
Net worth and property value are quite low as we’re just starting out saving and investing. I’d like to have $1-2M in liability due to the potential risks/liability if we were sued by a tenant. If there’s a risk for a big lawsuit, and the cost is affordable to have $1-2M coverage, it would make sense to have that instead of potentially losing the net worth that we do have.
State Farm would actually be the most affordable option with rental dwelling $1M + commercial umbrella at $1M. Just wanted to make sure a commercial umbrella would be ok since I don’t have a registered business. Deed and loan are in my name but I would hire a property management company. Do you see any issues going with this option?
A commercial policy usually just means a policy that insures more properties (meaning you’re owning them to make money rather than to live in) and/or a commercial building. If the insurer will issue the policy then it’s fine for you. You don’t need a registered business to get a commercial policy.