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, 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.

About the Author

Kate Horrell
Kate Horrell is a military financial coach, mom of four teens, and Navy spouse. She has a background in taxes and mortgage banking, and a trove of experience helping other military families with their money. Follow her on twitter @realKateHorrell.
  • guest

    Little known fact about the LLC route, if you hold a mortgage on the house and you dump it into an LLC, the bank can legally call the note due at any point so be careful with that route unless you have a few hundred grand lying around. Most banks wont realize you’ve moved it but legally they can call you up tomorrow and tell you to write a check…our real estate attorney shared that bit with us last year when we were looking at doing it, Instead we keep a million in property and another 2 million in umbrella. the cost for the umbrella is 305 a year for us and covers all 3 properties plus cars etc.

    • Kate

      Guest is correct. Technically, changing the title could cause the bank to invoke the “due on sale” clause of your note. It is extremely unlikely to happen, for many reasons, but it is possible. Moving the property to an LLC may also limit your options with regard to refinance and additional loans such as home equity loans, as loans against LLC owned properties can typically not be resold on the investment market. (Most loans are resold to investors.) This is yet another consideration when building the layers of protection between the liability associated with your property and your personal finances.

      • guest

        Yea our fear was even though it is highly unlikely, we don’t doubt that once interest rates rise (which inevitably they will) banks will look for ways to free up capital to re lend at higher rates to increase profitability