Personal liability protection is a major consideration for people looking to rent out an investment property. Prospective landlords are quite right to be concerned about claims and lawsuits from tenants and their guests.
If a tenant or their guest is injured on the property, and if they allege the injury happened because of a hidden problem the owner knew or should have known about, then that can put the owner’s personal assets at risk. Tenants can also seek to hold landlords liable for property damage, such as on a mold claim, or for violations of Oregon’s Residential Landlord-Tenant Act or a local city or county ordinance.
When a tenant sues and then wins at trial, they get what is called a money judgment against the owner of the property and/or the property manager. That money judgment automatically becomes a lien on any real estate the landlord owns in the county where the judgment is entered. The plaintiff or their attorney can also record the judgment in other counties or, in some circumstances, other states. Successful plaintiffs can also garnish paychecks and bank accounts or foreclose on other assets.
So, what steps do landlords take to minimize personal liability?
Many landlords choose to transfer a prospective rental property into a limited liability company (LLC). Transferring the house into an LLC before signing a residential lease can separate the landlord-tenant relationship from the landlord’s personal assets because the LLC is the landlord on the lease agreement (and the property owner). So, if a tenant or guest sues the landlord, they are suing the LLC, not the landlord personally.
Landlords often choose the LLC entity over a corporation or partnership because LLC’s offer all the same liability protection as other entities but are typically easier and less expensive to set up. LLC’s also offer pass-through taxation, which can save taxes as compared to a C corporation.
Transferring real estate into an LLC can also be quite simple. However, if the property is mortgaged, that mortgage company will have to approve the transfer, a process that sometimes adds delays and additional expense.
Setting up a properly formed LLC, and then transferring real estate into that LLC, is something that should only be undertaken with the help of an experienced and qualified business attorney. But done right, this process can provide greater personal liability protection for landlords.
Our attorneys have experience in business entity formation and Oregon’s landlord-tenant laws. Consultations can be scheduled through our website or by calling our office at (503) 206-6401.
The foregoing is general information and not legal advice. It is not intended to address any specific situation.