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Ask Dave

Need an Umbrella?

Patrick isn't sure if he needs a couple of things before buying rental property.

QUESTION: Patrick in Tennessee is looking to buy rental property. He isn't sure if he should get an LLC or umbrella insurance. Dave suggests an umbrella policy and reviews when to get an LLC.

Dave's ANSWER: There is a slight tax with a limited liability company, but nothing appreciable. I wouldn't worry about that.

I think there's an extra level of paperwork to do to have an LLC for one rental property. I would tell you that, until you get three or four properties, I would just keep them in your name. You can quit-claim deed them into a LLC once you get a little bit of size to your portfolio.

We certainly buy all of our rentals into LLCs. I try not to get more than $6 million or $7 million worth of property into one LLC and then I open another one. If you have significant assets in other places, I’d probably go ahead and drop it into a limited liability company in that case.

Risk management is all it is. I'd also certainly carry an umbrella policy when you’ve got significant assets. That's one of the best buys in the insurance world. Buy at least a $1 million umbrella. If you've got millions of dollars in assets, you may want to buy a $5 million umbrella. You can buy a $1 million umbrella on liability for $300 or $400 in most states.