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For investing in real estate in another state under an LLC, you have to register the LLC there and also pay a foreign LLC fee to CA of $800 per year, which is ridiculously high considering most other states charge nothing for a foreign LLC. Just for the “privilege” of living in California. Another option is to just not form an LLC and pay for an umbrella insurance policy. The pros and cons of owning LLC: * Can only lose as much money as in the LLC: a lawsuit cannot go after your other personal assets * Costs minimum $800 a year * Makes taxes more complicated * Have to pay / consult professional to set everything up correctly * Huge pain in the ass to transfer title of existing rental to LLC, some mortgage lenders will raise rates, and have to re-assess property value at the time of transfer, which could raise property taxes The pros and cons of owning umbrella insurance policy: * Can be better than an LLC alone if the lawsuit goes for assets less than the coverage maximum (example below) * Cheaper than LLC, about $400 for 1 million in coverage * Easier to set up, simpler for taxes * If the lawsuit goes over the coverage maximum, your personal assets could be in danger Example: Assume you have an LLC with $500k in assets. Lawsuit finds you are responsible for $200k in damages. With an LLC, you will lose $200k, assuming no umbrella insurance policy. With an umbrella insurance policy with a $10k deductible and $1M max coverage, you will lose only $10k. However, let’s now assume that a lawsuit finds you are responsible for $2M in damages (a death on the property, for instance). With an LLC, you will lose all the assets of the LLC, so $500k. They cannot go after personal assets. With the umbrella insurance policy, you will pay the $10k, and you will still be responsible for the $1.5M above the insurance coverage Max. Your personal assets are in danger, and you will lose over $1.5M. Obviously the best coverage would be to have both an LLC for the property and an umbrella insurance policy, but that’s the most expensive. Curious what other California out-of-state investors have done?
Everyone should have a liability umbrella in lawsuit crazy US, whether you are a landlord or not. I pay $317 for a $3M policy.
Could u please share which insurance company you use? Thanks
Erie Insurance - it's an east coast regional carrier. If you are in California you should look for a smaller carrier there or an insurance company that specializes in umbrella insurance. $400 for a $1M policy seems very high. I've had these policies for a long time on both coasts (although not California) and never paid anywhere close to that.
There is so much confusion around this — LLC or not, what type of umbrella insurance to buy/coverage? Who should i be talking to — a real estate lawyer or some other expert to set this up correctly?
Hire a local goon to bury any evidence