Paycheck Chronicles

Rental Real Estate and Liability

Many military families become landlords when they PCS and can't, or don't want to , sell the house they've purchased.  Being a landlord can be a blessing or a nightmare, depending on a wide variety of circumstances.  One potential pitfall of landlording is often overlooked by those just starting out:  liability.

According to Merriam-Webster.com, liability means, "the state of being legally responsible for something."  Unfortunately for landlords, liability can come in many shapes and forms.  Of course, landlords are liable for the obvious things, such as maintaining a safe and livable rental property.  However, landlords can also be found liable for environmental hazards, injuries, criminal activity, and even, rarely, the behavior of a tenant's pet.

In theory, an ambitious attorney can include the property owner in just about any litigation that involves activity that occurred on the property, even if it isn't remotely related to the owner.

How does a property owner protect themselves when they become a landlord?  There are several levels of protection, and a smart landlord should consider all of them.

First, make sure your lease is protective to the landlord.  Assign all liability for accidents, injuries, criminal activity and pet behavior to the tenant in your lease.  Be sure to check your state's laws to ensure that everything included is legal.  This won't cover you completely, especially in cases of accidental injury, but it is a good first layer.

Second, make sure your lease requires your tenant to maintain renter's insurance that includes liability coverage.

Third, consider your own liability coverage.  Landlords really must have "umbrella liability" coverage, which is a broad liability policy that covers all areas of liability and extends the liability coverage of your auto policy, and any homeowner's or fire policies that you might have.  In days past, one million dollars of coverage was often considered adequate, but you need to consider your specific coverages.  Yes, a million dollars sounds like a lot of money, but it isn't much in today's lawsuit-happy society.  Our family carries two million dollars of umbrella liability insurance, and I'm considering increasing it.  Umbrella insurance is relatively cheap, a few hundred dollars per year, and it is tax deductible as a business expense if you are carrying it because of your rental property.

Fourth, consider how the title to your house is held.  Forming a limited liability corporation (LLC) , and holding the house within the LLC, may provide you with additional protections.  Depending on your state, this may be cheap and easy or cost several hundred dollars per year, and the level of protection it provides also depends on the state.  It would be worth consulting with an experienced rental real estate attorney to decide whether an LLC is the right solution for your situation.

Owning rental property is always complicated.  Take one level of complication out of the equation by ensuring that your personal interests are protected from property related liability.

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