Have you ever stopped to think about losing your investment property or your personal home? The answer is probably, “no, why would I think about it?” The truth is that your life can change in the blink of an eye. Something as innocent as causing an accident that causes major harm or even death to the other party can spell disaster for you and your family.
There are some strategies that you can use to protect yourself and your family from losing it all. I am going to address four strategies in this article. **Disclaimer- we are NOT CPAs or attorneys; you will want to consult an attorney or CPA regarding your personal situation. ***
1. Landlord Insurance
A landlord insurance policy is referred to as a DP3 policy (Dwelling Protection Policy) and is an open peril policy covering most items. A landlord policy covers the dwelling and NOT the resident’s belongings. That’s where their renter’s insurance policy comes into play.
There are two different policies that we want to concentrate on, which policy you choose depends on the number of properties you own. A personal umbrella policy applies to landlords that have three or fewer properties. With this policy, the minimum amount of protection should be no less than $5 million and $500,000 in liability.
The second policy is a commercial umbrella policy covering investors with four or more properties. The coverage should be no less than $5 million PER property and a base liability of $500,000 per property. A commercial policy isn’t expensive for the protection that you get. We have a client that owns 12 properties and pays roughly $1080.00 for all 12 properties.
2. LLC- Limited Liability Company
If you own properties in California, it can be expensive to open an LLC for each property. You can set up an LLC in Wyoming or Delaware and get better protection than what California has to offer. Having an LLC limits your exposure to just this one property held in the LLC should a renter come after you for damages. “What happens in the LLC box stays in the box”. Meaning if you only have one LLC per property, only the one property is subject to retribution collection.
3. Lines of Credit
Another benefit of establishing an LLC is, you can take out lines of credit per LLC thus showing that you have no equity in the property when you actually do. Be sure to talk to your CPA about this to make sure the tax benefit is right for you.
Lastly, having multiple out-of-state LLCs offers anonymity, showing you don’t even own property or properties.
4. Homestead Exemption
The California homestead exemptions allow homeowners to protect a certain amount of equity from debt collection. This applies to state law debt collection as well as those that find themselves in bankruptcy. The law protects homeowners from being forced to sell their homes or at least limits the number of equity trustees can go after. You can check out this article by Heston & Heston Law.
The old exemption in California only protected you for the first $75,000 for a single person, $100k for a family of at least two, and $175k for those who are elderly or disabled. As of January 1st, 2021, the exemption increased to a minimum of $300k and a maximum of $600K depending on the county you live in. In other states, like Florida, all the equity in your home is protected from debt collectors. So, if you own a property in California, you might consider having a higher umbrella policy.
You might also consider having a Land Trust LLC set up in Wyoming, which gets the property out of your name and gives you negotiating power on a Judgement against you.
In summary, even if you only own your personal residence, you need asset protection. If you own rental properties, you definitely need asset protection.
Call Tyler today if you want more information regarding this topic.