There are more factors to consider than just chic furnishings and excellent guest reviews if you operate or intend to operate a short-term rental (STR) business. How about safeguarding everything you’ve constructed?
That is the main topic of discussion between podcast host Dave Menapace and his guest Jeff Hampton, who is an experienced lawyer and STR investor. Jeff used to be the one suing property owners, so he wasn’t just reading about the dangers. He is now assisting them in safeguarding their assets before problems arise.
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Start with reliable insurance.
Do you believe you are covered? Rethink your thoughts. Jeff has seen innumerable investors who believed they were protected by their policies, only to discover that there were unstated business-use exclusions in the fine print.
Expert advice:
Don’t depend on typical landlord or homeowner policies. Commercial-grade insurance with a minimum of $1 million in premises liability coverage is required for STRs. This is your first line of defense, so don’t neglect it.
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Go Beyond the LLC
LLCs are a terrific place to start, but they are not a panacea. Jeff cautions that a lot of people believe that simply creating an LLC is sufficient. However, it’s simple for a lawsuit to breach the corporate veil and target your assets directly if you don’t follow the rules, such as maintaining records, holding annual meetings, and keeping separate finances.
Tip for action:
Handle your LLC as though it were a legitimate company. Even if you’re the only member, you should still follow the rules, use separate bank accounts, and keep clean books.
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Carefully Group—Or Not at All
A typical error? Combining several properties into a single LLC. Although it may seem practical, if one of your properties is sued, it could reveal everything you own.
Safer action:
For every property, use a different LLC. Although it requires more setup, it helps isolate risk so that a single unsatisfactory guest at one property won’t devastate your entire portfolio.
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Avoid Red Flags by Using Land Trusts
Be careful if you have previously purchased properties in your name and now wish to transfer them to an LLC. Your mortgage’s “due on sale” clause might be activated by that transfer.
Jeff advises avoiding that risk by utilizing a land trust. A land trust can provide privacy and conceal changes in ownership without raising red flags at the bank.
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Make Future Plans with Holding Companies
Do you intend to scale your properties? Jeff advises thinking about a holding company approach, particularly if privacy is a priority. In the event of a lawsuit, ownership information can be protected by an Arizona Limited Partnership or a Wyoming LLC.
Advanced strategy:
The majority of your assets remain safe even if one property is hit by the law because limited partners in Arizona are permitted to cut off their relationship with the general partner (you) during a lawsuit.
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Avoid Waiting Until It’s Too Late
The most significant error? Don’t wait until you have a lot of properties before making all these arrangements. In addition to saving money and reducing stress, starting with the appropriate legal and insurance structure safeguards your future as you grow.
Jeff’s Advice:
“If you’re a new investor, this is the best time to learn. Don’t let a legal issue derail your journey before it even begins.”
Final Thought: Build a Dream Team
As Dave points out, running a STR is a business, and like any other, it requires a strong team. This includes an experienced lawyer, tax planner, lender, and insurance specialist. Instead of passing you off to the next guy, these professionals ought to collaborate.
You’ve put a lot of effort into growing your rental company. Make sure it is based on a solid legal foundation that can withstand any situation. Take it one step at a time if this seems too much to handle. Get the right insurance first, then LLCs and trusts.
The goal of asset protection is freedom, not fear. The flexibility to confidently expand your company.