How do investors minimize their rental property liabilities to ensure a higher return on their real estate investments?
As investments in the capital markets are expected to yield lower returns in coming years, many investors are turning to real estate, and in particular single-family or multi-family rental properties, to create growth in their investment portfolio.
Unlike capital markets investments, investing in a rental property or properties comes with direct exposure to liability. Investors in rental properties would be well served by seeking the legal advice of a Florida real estate attorney with experience in managing the legal risks involved with being a landlord in this state.
In particular, landlords with any number of rental properties should consider working in tandem with an experienced real estate law firm to manage entity formation, draft lease agreements, set up standard operating procedures that mitigate risks and select an umbrella insurance policy appropriate to the landlord’s level of risk exposure.
If a rental property (or group of rental properties) is held directly by an individual, that individual is said to directly own the property as a sole proprietor. In this scenario, lawsuits originating from the property can result in tenants and visitors to the property suing the landlord directly, which puts the landlord’s other properties and assets at risk. Likewise, the landlord’s creditors can go after a property owned directly by the landlord and, for example, attach a lien to it. This is because without legal separation in place between the landlord and the property, the property would be considered the landlord’s personal possession.
To avoid the liability exposure in these two scenarios, many real estate investors have chosen to place their rental properties in a limited liability company (LLC) or to hold them in trust. When landlords plan to structure their real estate properties into entities like an LLC or hold them in a trust, there are important legal considerations that are best handled by an experienced attorney. One consideration, for example, applies when multiple properties are involved. An estate planning attorney with a background in real estate asset management can help landlords to determine if it makes financial sense to hold a property in a trust or within an LLC, whether multiple trusts or LLCs should be formed to hold multiple properties and, if a trust is used, whether an irrevocable or revocable trust would better serve the goals of the landlord. The ultimate decision on how to hold real property can significantly impact the tax liability, asset protection and ability to pass the properties to the next generation.
What would be an optimal entity formation or trust configuration for one landlord would not necessarily be the right decision for another landlord. Factors that determine the right legal structure in which to hold properties might include, but are not limited to the following situation:
- Whether the landlord holds a single property or multiple properties
- The value of the properties and the amount of rent paid by the tenants
- Whether the landlord is a business entity or an individual
- Whether the landlord is a foreign national without residence in the US, or a US resident or citizen
- Whether the landlord intends to pass the property or property portfolio to the next generation as part of an estate plan
- Whether the landlord is in a profession or engaged in a business with a high probability of being sued (eg: if the landlord is a medical surgeon who may be sued for malpractice)
Drafting Lease Agreements
Making sure that all legal bases are covered in the lease agreement used for each property will go a long way to mitigating risks and ensuring that the landlord can capture costs as needed to help ensure the profitability of their investment. Because each property may have different characteristics and amenities, it is important that these are factored into the language of the lease agreement.
Investing in the time, attention and costs required to create a tailored lease agreement for each property can pay enormous returns in terms of reduced liability and increased profitability. A well drafted lease agreement, while not completely removing all liability, can at least ensure that tenants specifically agree to certain responsibilities, expectations, consequences and enforcement options.
“To avoid the liability exposure in these two scenarios, many real estate investors have chosen to place their rental properties in a limited liability company (LLC) or to hold them in trust.”
Setting up Standard Operating Procedures
Standard operating procedures or SOPs are often associated with larger corporate and governmental institutions that can afford to use bureaucracy to manage risk. However, being a responsible and conscientious landlord of multiple properties is easier when there is a process to follow that ensures certain tasks will routinely be completed on time. Afterall, the law holds landlords liable for the general well being of the tenants when it comes to the following:
- Criminal activity in the neighborhood as it affects personal safety and personal belongings
- Hazards on the property resulting from poor construction, lack of maintenance, the surrounding environment or failure to adhere to building codes
- Potentially dangerous animals that are not owned by the tenant
- The conduct of other tenants or guests on the property who are not invited by the tenant
- Adherence to the Fair Housing Act and Florida statutes protecting certain classes of people from discrimination, targeted mistreatment and exclusion
Some landlords opt to hire property management companies to help in these areas as a way of ensuring that the landlord is not seen as negligent. While the ultimate responsibility and liability remains with the landlord, if a property management company is used, the landlord can have an experienced real estate attorney review the service level agreement to ensure that the management company shares in the liability in case of a lawsuit.
Layering different Property and Casualty Insurance Policies
Using an umbrella insurance policy in addition to landlord liability insurance will afford landlords additional protection and coverage in the case of claims from an injured tenant, visitor or squatter of the property.
Landlords with larger portfolios can use a single umbrella policy to cover multiple rental properties in different parts of town or even different cities and states, provided that these properties already have underlying landlord liability insurance policies.
South Florida Law
Having a successful real estate portfolio in Florida requires a strong relationship with an experienced legal partner who can represent you as a landlord in matters of business formation, document drafting and potential disputes. South Florida Law has the resources and experience to work with individuals and companies all over the world who wish to own or control rental properties in Florida. Whether you are a Florida resident, out-of-state resident or resident outside of the United States you can rely on the attorneys of South Florida Law to represent your interests and ensure local compliance. With offices in Broward and Miami, we cover all of South Florida and are licensed to provide legal services throughout the state. Contact us today on (954) 900-8885 or via our contact form.