landlord llc vs umbrella policy

One of the most common topics of discussion I hear in the landlord world is whether or not to create a landlord LLC (or Limited Liability Company) for their rental properties.

I think it’s important to point out that the reason this comes up so frequently is that it stretches across the two main issues landlords face:

  • Legal liability
  • Tax liability

Note: LLCs do not create any tax advantages for landlords but more on that later…

To help you better understand what an LLC can do for landlords, and help you ask better questions for your tax professional, there are several key points to consider.

Landlord LLC Cost

If you’re a do-it-yourselfer landlord, you’ll be visiting a site like to create your LLC. The base cost is $79 plus any applicable state filing fees. The state filing fees range from less than $100 to over $200. Check your state fees by selecting the state in the drop-down box on the pricing page.

Of course, you’ll get hit with all kinds of upsell opportunities to drive the price higher and higher.

Personally, I went for the higher package to have everything handled at once and in one place so paying the extra for the Tax ID and Registered Agent made sense for me at the time. Overall, my cost was $690 to file for an LLC in New York back in 2007, and from what I can see, the costs are about the same today.

Estimated Cost to DIY – $400 to $800 depending on state fees and convenience add-ons

Now, I recently had my attorney set up a new LLC in 2014–not that I had a bad experience going through LegalZoom, but because he was already representing me in a real estate transaction.

My total costs using him was $1500, with the most notable difference being I did nothing but sign a document. It cost me no time or energy.

Estimated Cost to use an Attorney – $1000 to $1500, based on my experience.  

I’ve also consulted with and approve of the work Mark Kohler does (see video below) and he sets LLCs up for landlords all over the U.S.

Legal Liability and LLCs

When landlords think of legal liability, we all think about getting sued by a tenant. So I’ll begin the conversation about liability by stating that an LLC structure is not completely rock solid when it comes to limiting personal liability.

If you were personally responsible for a neglected job (snow removal, pool maintenance, etc.) that resulted in a tenant injury, you’d likely be liable as an individual. Also, in situations where a law was broken or you were involved in deceptive business practices, you’d be personally responsible.

Another legal liability to be aware of is not keeping the finances separate. If the rental is not capitalized enough to cover expenses and you’re paying out of a personal account, versus the business bank account, a plaintiff in a lawsuit could make the case that the investment was never truly separate. So keep the finances completely separate between the LLC and anything from your personal life. This means no trips to the mall for new shoes with the LLC debit card.

Set Up an LLC Bank Account

Setting up a bank account for your LLC is fairly easy once you have all the documentation from the state and a Tax ID number. This is a must to keep the business transactions clearly separated and makes accounting a lot cleaner come tax time.

Can you transfer a mortgage to an LLC?

My final thought on the banking is to beware of your bank’s (or mortgage holder’s) policy on transferring ownership of the property to an LLC. If you purchased the property personally, then transfer it to an LLC, you may be enacting the banks due on sale clause.

Since most lenders will look at the transfer from personal to LLC as a sale, according to the terms of the mortgage, they can accelerate the loan and cause you to have to pay the balance or refinance.

This can turn into a mess if you lose a low-interest rate on the refinance, or even worse don’t qualify for a new mortgage at the time. Be sure to get answers from your lender before making the switch to an LLC.

Landlord LLC vs Umbrella Insurance

All landlords should have a separate landlord insurance policy for their rentals. This is important enough to repeat – ALL LANDLORDS SHOULD HAVE A SEPARATE LANDLORD INSURANCE POLICY!

An LLC is used to create a barrier between you and your assets. Its sole purpose is to reduce your liability as a real estate investor.

An umbrella insurance policy (sometimes called “excess liability) will cover you up to a certain amount for large lawsuits filed against you.

Events such as the following could be covered under an umbrella policy.

  • A guest trips and falls on a bad stair
  • A third party sues you (neighborhood kid slips on your sidewalk)
  • Landlord negligence that results in theft such as not changing out locks

Hypothetical Scenario

Let’s use a real-life example to break down what would happen to a landlord based on their protections.

A jury in 2017 awarded a construction worker in Arizona $1,600,000 for blindness caused to his eye while on the job.

Now let’s say you have an elevated porch on the rental property and it collapses while your tenant was having a BBQ.

The aftermath results in one guest being permanently blinded by the accident.

The tenant’s guest successfully sues for medical bills along with pain and suffering. The courts award them $1,600,000 in the verdict.

If the landlord has no insurance and does not have an LLC set up they will pay this out of pocket.

If the landlord has an umbrella policy but no LLC they will be on the hook for whatever the umbrella policy does not cover. A common umbrella policy is for $1 million in protection. In this case, the landlord is responsible for $600,000 still.

Without an LLC the injured person will go after the landlord’s personal home, rental properties, autos, and savings to recoup the additional $600,000. They can even garnish future wages up to 25%.

Now, let’s say the landlord had the umbrella policy AND an LLC set up.

The LLC acts as a liability barrier between the landlord and the rental property. The injured party could go after the rental property but the landlord’s personal assets will be safeguarded.

An additional line of defense is to require your tenant to carry renters insurance. In the scenario above the renters insurance can help pay towards medical bills and is very affordable at around $10 a month.

Should I create an LLC for my rental property?

We had Mark J. Kohler on our podcast to discuss this topic at length. He’s an attorney and CPA and sets up LLCs for small business owners all over the U.S.

In the video above he lays out these tips for creating an LLC.

  1. Setup the LLC in the correct state (4:15)
  2. You have to register where the property is (6:00)
  3. Find the right balance for setting up your LLCs (7:45) – “It’s not the quantity of properties but the quality of properties”
  4. Find a law firm you can trust to get setup correctly (9:15)
  5. Maintain the entity (11:20)
  6. Use your LCC (13:45)
  7. Deed the property to the LLC (16:00)
  8. Have a checkbook and tax ID number (17:00)
  9. Rent is paid to the LLC account (17:00)
  10. The lease agreement is reflective of the LLC (17:00)
  11. Do the annual maintenance (17:00)

Should landlords have a separate LLC for each rental property?

This really depends on the quality of the properties and not the quantity. Having one rental with $500,000 of equity is the same as having 10 rental properties that total $500,000 in equity. It could make sense to have one LLC for a premium rental property and it can make sense to cluster 5 lower equity properties into one LLC. This is where consulting with a real estate attorney can be helpful to decide what suits your needs.

LLC for Rental Property Pros and Cons

A quick recap of the pros and cons of having an LLC for your rental property.

Pros of LLC – You’ll limit your liability and create a barrier between your rental property and personal assets. This will reduce your personal liability substantially in the event that a tenant or guest is severely injured on your property.

Cons of LLC – It costs money to set up, you must maintain the LLC and keep yearly meeting notes. Some states have yearly filing fees that can become expensive. You also must stay within the legal framework of the LLC or it could be voided in a lawsuit. For example, if you do not maintain a separate bank account a plaintiff could argue it’s not a proper LLC and it’s a personal asset.

Does a rental property LLC have a tax advantage?

LLCs do not save taxes for landlords. The LLC is strictly for limiting liability and does not create any tax advantages. You have the same tax savings regardless if you have an LLC or not. The way you prepare for your taxes could be affected depending on the type of LLC you have setup.

Tax Liability Considerations

As it was explained to me, I will relay exactly what my accountant told me about how an LLC will affect my taxes.

If you’re a single owner LLC, chances are the way you file taxes won’t change much from life before the LLC. Your property is likely reporting income and losses as a Schedule E on your personal tax returns and will continue to do so under the new LLC.

If the LLC has multiple owners (husband/wife, partnerships,), a separate partnership tax will have to be filed. In other words, the LLC will have its own tax return. If you’re married and don’t want to file this way, the only way around this may be to have one owner, and the spouse right of survivorship. Meaning in the event of your death, your spouse would then become the owner.

Since every landlord’s situation is so different, you’ll want to check with your tax professional before jumping into an LLC if taxes are of any concern. Trust me on this, do not try to navigate the tax system on your own. Even if you know enough to be dangerous, a second opinion can’t hurt.

Final Thoughts

For me personally, setting up an LLC makes sense. I own several businesses and properties and have good relationships with my accountant, insurance agent and attorney. The only situation I could imagine not having the LLC is if there was some major tax advantage and the insurance coverage (renter’s and landlord’s combined) was more than sufficient. The only way I’m figuring that out is to consult the professionals that understand my unique situation, and that I trust to advise me.

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