Rental properties can be a good investment.  With the right tenant, you can enjoy any upside in the real estate market, and also generate a steady flow of income.  But lurking close below the surface of those benefits is the risk of liability!

Liability is when you owe someone else something.  In the case of the rental property, the liability risk is the tenant, or one of their friends, has an accident on your property, and all of a sudden, you are liable for those damages.  And that means all of your assets are vulnerable.

Many of my clients have umbrella insurance policies.  And these are always a good first line of defense.  But insurance is not bullet proof.  An insurance company does not really want to pay claims.

A better, more solid form of protection comes from the legal entity of a limited liability company or LLC.  As the name suggests, it is designed to limit the liability of the entity’s owners.

An LLC is a standalone entity that would own the rental property.  That same “accident” by a tenant or friend, limits your liability to the assets within the LLC – this means the worst case scenario is the rental property itself falls victim to the plaintiff, but the rest of your assets are protected.

And conversely, if you end up in a car accident, let’s say with a school bus full of attorneys’ kids, the rental property would be insulated from that lawsuit.

But the key to maximizing these protections is to have the LLC properly created.  This includes a strongly drafting operating agreement (i.e. rules of how the LLC is run) and ensuring the property is properly transferred into the trust.  Following the corporate “formalities” is also a must throughout the life of the LLC.  Our attorneys are well versed in helping and advising our clients in creating and maintaining their LLC.

If you want to secure your rental property and protect your assets, make an appointment and talk with one of our attorneys.  And we can help get your LLC in place.

Contributed by MH Albuquerque, Santa Fe and Las Cruces Estate Planning Attorney, James P. Plitz.

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This blog should be used for informational purposes only.  It does not create an attorney-client relationship with any reader and should not be construed as legal advice.  If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.