Why You Should Be Using an LLC to Protect From Liability Claims on Renovations

How Personal-Name Ownership Amplifies Liability

Quite simply, if you own a renovation property in your own name, you are personally responsible for any legal claims filed against you. You can then stand to lose anything you own, including your savings, any other investment properties you own, or even your home. 

Your premises liability insurance does not cover any contractors working on renovating your investment property. You may have heard about taking out a “Builder’s Risk”-type policy, and it’s true that it will cover personal injury or accident—to you or your tenant/a visitor, but again, not a contractor or subcontractor working on the property. Contractors need to be covered by their own insurance. 

You also cannot use personal liability insurance to pay for investment-related claims; you must take out premises liability for anything investment-related. 

As an investor, you’re not left with many options if you own your investment property under your own name. You are legally responsible, and there’s not much recourse if something goes wrong during or after a renovation because insurance won’t cover workers on your premises.

Why an LLC Creates a Legal Boundary Between Rehab Risk and Personal Assets

When you form an LLC for your investment properties, if the renovation contracts are between the contractors and the LLC, not you personally, then any legal claims in connection with the property can only be filed against the LLC, not you personally. That means that your personal assets (your own home, personal savings, car) are protected; only your company assets (say, another investment property held under your LLC) are open to claims. Even if a liability claim results in you having to pay the claimant, if you don’t have enough in your business assets, the claimant cannot go after your personal assets.

Considering how easy it is to set up an LLC, it’s a no-brainer for any real estate investor. However, you have to run them diligently and conscientiously. 

If you start mixing personal and business expenses, for example, by using your business bank account for your personal bills, you are breaching that legal LLC shield, potentially opening up your personal assets to litigation after all. But, so long as your LLC is run correctly, it does protect you. You also don’t have to run a company to form an LLC—you can be a single-member LLC.

How LLCs Work With Insurance

Despite all of its benefits, setting up an LLC does not mean that you don’t need to take out insurance on your investment properties. There are many scenarios where having an LLC will not protect you from a claim. For example, you still need home insurance to protect you from natural disasters and hazards like fires. 

Or let’s imagine another, far more common renovation-related scenario: Someone visits the premises while you are also there during the renovation and slips and falls. They could still sue you personally, and if the court found that the accident was the result of your own personal negligence, you could still lose personal assets. That’s why a premises insurance with a Builder’s Risk policy is still essential.

Why Investors Doing Value-Add Projects Should Always Have Entity Protection

Value-add investments are by their nature more complex than turnkey investments. There is more that can go wrong both during and, crucially, after the renovation—in some cases, even after you’ve sold the property. 

Think of an LLC as that vital shield against “unknown unknowns”: You simply can’t predict or avoid every eventuality because of the multiple parties involved, so it is essential to protect your personal assets against any claims that you are potentially being exposed to.