Hello-

Many of my clients purchase rental properties or inherit rental properties.  Attorneys are telling these people that they should be putting the property in the name of an LLC to protect the owner - which is a very wise suggestion.  All of those people without LLCs are just opening up their liability exposure and will be personally sued if there is ever a claim on the rental property involving personal injury/death etc.  I am not an attorney and will not get into the legal ramifications of all of this but I agree that the more protection you have the better.  The LLC is a wise choice for any rental property and I suggest that you speak with your real estate attorney about this option.

That being said -- how does this affect insurance?  If someone buys a 1-4 family rental property, many insurance carriers who handle personal home insurance will be able to give a quote on these properties under a policy called a Dwelling Fire policy.  It's a policy that includes coverage for the house itself and will many times include the liability and other additional coverage that protects the owner.  The majority of the insurance companies don't like to write the rental properties for you unless they have your primary home as well.  Some will extend liability from the primary home to cover the rental property (at an additional fee).  This is all assuming the home is in the name of the owner.

When someone actually puts the home into an LLC name it drastically changes the dynamics of how an insurance company looks at the risk.  Most insurance companies now view LLC properties as pure investment properties and go on the assumption that it could be one of many properties to come for that owner.  So what's happened is that a good majority of the insurance companies will now tell you that the rental property in the name of an LLC has to be put on a commercial policy.  The commercial policy can provide greater coverage for the owner but generally the cost of these policies is much greater than a personal policy.  Many consumers get a little bit of sticker shock as they are not expecting to be put on a commercial policy at a higher rate.

There are a few remaining insurance companies who will allow an LLC property to be put on a personal policy but generally they want to be assured that it's a single-member LLC or a couple who just happens to have the one rental property and who are not in the business of buying investment properties.  The people who are planning on buying multiple properties really are better off going the commercial route anyway as the coverage can be much more broad and offers greater protection overall.

So the bottom line here is if you are buying a rental property or selling a rental property -- consult your attorney about the LLC and talk to your insurance agent about the proper coverage.  Over the years I've known people who have owned rental properties in their own names - there were deaths from fires and the owner was named personally in the lawsuits.  Your attorney can explain the benefits of having such properties in an LLC to protect against losses like this.  Just know that once you do that the insurance products that will be available might be commercial products vs. personal insurance products - which is not a bad thing.

One last key point is some insurance carriers will add the LLC on to the Dwelling Fire policy as an additional insured.  This is something you want to avoid.  In that scenario - both the owner and the LLC will be subject to any liability claims.  You want to make sure that the insurance can be put solely in the name of the LLC if you decide to have the property in an LLC name.  As always consult your attorney and your local insurance agent for proper guidance.

Pete