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Protecting Assets

Old 02-23-2009, 07:19 PM
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Default Protecting Assets

This isn't aviation related law, but I figure more than a few pilots own rental properties and are familiar with protecting their assets.

I ended up in a jury (those of you who lurk are painfully aware). Turns out I was the alternate, so I didn't get to deliberate. Anyway, I was amazed at the punitive damages they awarded the plaintiff.

I am about to buy a rental property (my first). What do I need for protection? It's a 3 bed/2bath that appraises around $130,000. I have a quote for liability insurance (for $300,000) and am considering an LLC. Do I need the liability for the LLC or for myself personally? Should I put my own house in a separate LLC? The way I understand it LLC's basically protect personal assets? Is liability on the rental enough? I guess just how it all works!

It's a little discouraging to try for a plan B, intend to be a conscientious landlord and know some jury can take it all away if someone slips on ice, falls and hurts themselves. Okay done whining now...
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Old 02-23-2009, 08:00 PM
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The best ways to protect your assets and yourself can vary from state to state. Laws regarding landlord liability vary even more. Creating a corporation or limited liability company can help, but it requires that you do business in a certain way and protection may in some cases be limited.

You're planning on owning rental property. That's a business. Treat it as one and get legal advice, not recommendations from "some guys on the Internet" who may or may not have a clue. What you pay for it now may help avoid paying more for it in the future.
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Old 02-23-2009, 09:29 PM
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Originally Posted by NoyGonnaDoIt View Post
The best ways to protect your assets and yourself can vary from state to state. Laws regarding landlord liability vary even more. Creating a corporation or limited liability company can help, but it requires that you do business in a certain way and protection may in some cases be limited.

You're planning on owning rental property. That's a business. Treat it as one and get legal advice, not recommendations from "some guys on the Internet" who may or may not have a clue. What you pay for it now may help avoid paying more for it in the future.
I own rental property, and have personal assets too. An LLC is generally sufficient to separate your personal from your business assets.

Basically the rental property is owned by the LLC, and you own the LLC. A few potential issues...

An LLC only protects your personal property. If the LLC gets sued by a tenant, the rental property is fair game. If set up and managed properly, an LLC should protect your home (and other assets) in most states.

The problem with LLC's is that they must be setup and managed properly...if this is not done a plaintiff's attorney will claim that it's not really a seperate business, but rather you, an individual, trying to hide behind a piece of paper. The devil is in the details, here are a few gotchas...

The rental property must be titled to the LLC. In my state, you can transfer the property from your name to the LLC without paying taxes if you own the LLC.

The mortgage...whose name is it in? It really should be in the LLC's name. This will probably be the hard part...banks will be reluctant to loan to a startup business, or to transfer a loan taken out in your name.

The management and finances of the LLC must be totally separate from your personal assets:

- Setup a checking account for the LLC. Pay all LLC expenses out of this account (get a credit card if you like).
- Document all financial transactions.
- If you need to transfer money to the LLC for expenses, issue it a loan with a loan document (one page is fine).
- If you pay for something (plumber, paint, etc) out-of-pocket, fill out an expense report, and have the LLC cut you a check.
- Charge the LLC a pro-rated annual fee for the use of your home office.
- Ensure you comply with relevant state record keeping and reporting requirements.
- Get all state and local business licenses.
- Understand and comply with all landlord/tenant laws...they are numerous and often do not make any sense. Get a book specific to your state.

The LLC can accumulate debt to you personally...mine certainly has. Just document it to show that the LLC owes you. The key is to avoid EVER spending your personal money on LLC business unless that money is fist legally transferred (loaned) to the LLC. The LLC does not necessarily have to pay you back in the short term, it might take years to get enough positive cash flow.

As was mentioned, DEFINATELY get a lawyer to setup the LLC, and advise you on how to operate it in your state. Licensing an LLC with your state is only part of the process...you MUST do some other legal documents to actually establish the LLC.

$300K sounds OK to me for liability on a $130K property.

Slum lords make the most money (highest margin), but that is a full-time job. The hassles are endless when dealing with the bottom segment of society. I prefer to operate upscale property and deal with reasonable, reliable tenants.
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Old 02-24-2009, 02:36 AM
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Yes, I was definitely going to see a lawyer to set it up.

Thanks Rick for all the advice!
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