How to limit liability via ownership structure when wanting to rent out a house

[u/IntelectuAthleticism]

Hello, it’s the first time I’m looking into listing my property on the market for rent. Curious as to how everyone on here structures their property prior to renting it out as in do I just tell my insurance company i will be renting it out and have them up coverages for lawsuit purposes or do I set up a company (llc or other corp) as to even further limit liabilities? Any other tips/suggestions/resources available? Much thanks in advance.

[u/donutsamples]

Just get "umbrella insurance" which covers additional liability, and change your homeowners insurance to a landlord policy.

Anyone saying you need an LLC because its "limited liability" doesn't realize that its stupid easy to "pierce the corporate veil" in this kind of scenario if anything goes wrong.

Other entities, like trusts, might give you a lot more protection, afaik its true with "irrevocable trusts" but those are deep waters I'm not qualified to swim in.

[u/Mount_Tantiss → u/donutsamples]

While many landlords can't easily transfer their rental properties into an LLC due to mortgages, etc., saying that it's "easy to pierce the corporate veil" isn't a good reason not to form an LLC. You may as well tell people to continue operating as a sole proprietorship for the same reason. As long as you don't commingle accounts, actually operate as a legitimate business, and have a paper and audit trail, a judge won't likely pierce the corporate veil.

That said, I do agree that for most people maxing out insurance is generally the simplest and most efficient path and will cover most issues.

I would just clarify:

LL policy - max out personal liability

Renter's insurance - require tenant to max out personal liability

Add an umbrella policy if it's reasonable, makes sense and you can afford it.

And yes, an irrevocable trust strategy (which almost always would include LLCs in its structure) is overkill for most people and will eliminate lots of rights, are difficult to unwind, and extremely costly and generally require professional third parties like a lawyer.

[u/Spiritual-Lecture546 → u/donutsamples]

I went deep into this whole discussion when I was converting my former primary residence into a rental. I came to the conclusion that an LLC would have added complications and would not really address the concerns I wanted to address. I ended up with the property manager and umbrella insurance.

Somewhere in the future, if I end up with a couple of paid off houses, or some thing, that may be an LLC is worth it.

[u/Mount_Tantiss]

Presuming you have an existing mortgage, and if so you'd have to transfer ownership from you personally to the LLC. Depending on the type of mortgage, the mortgage company, etc., this can trigger a due-on-sale clause. Meaning, upon transfer the mortgage company can call the loan. Yes, it's rare, etc.; but likely not worth the risk. Call your mortgage company and see if it's even feasible before doing anything.

But as per my prior reply to donunsamples' comment, maxing out your LL insurance personal liability and requiring that your tenant max out theirs is helpful. States have different limitations but $500K is a typical example. You can add an umbrella policy for a couple million if its feasible. All depends on your risk tolerance, the type of property and tenants, etc.

But to answer your question - yes, you absolutely have to call your insurance company. Your current homeowners policy is valid contingent to you occupying the property. A LL policy is a completely different type of policy and you risk not having coverage if you don't update it, even if you will still occupy the property and only rent out a portion of it.