Episode 69. 3 Asset Protection Tips for Househackers

October 25, 2022

-Get the Right Insurance, and Use it Correctly 
-Create a Customized Lease
-Communicate with Friendly Formality

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In this episode, you’ll hear:

  • Get the Right Insurance, and Use it Correctly 
  • Create a Customized Lease
  • Communicate with Friendly Formality

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Get the Right Insurance, and Use it Correctly 

The two insurances I suggest all houshackers have are a robust home owners policy and an umbrella policy not less than $1,000,000. Two hidden insurance risks facing house hackers lies in the fine print of insurance policies. If you rent by the room or rent the property on Airbnb in your absence, you gotta let your insurance company know this. If a tenant or guest causes damage or gets hurt on the property, your insurance won’t pay out of they discover the cause. I’d bet on them finding out because insurance companies HATE to pay out on a policy.

All house hackers need to update their insurance policy once they move out of the property as well. Insurance policies differ based on whether the property is owner occupied or not. Once you move onto another home, don’t forget to give your insurance a call!

Yes, both of these notifications are going to cause a bump in your insurance premium. However, your insurance will cover you. No point in paying a premium that won’t pay out at all. 

Create a Customized Lease

Leases are the cornerstone of your rental business, and househackers are no exception. It keeps you getting paid and protects your possessory interest in the property. For househackers, leases are especially important because they protect your own quality of life. You realize just how crappy your lease is when it’s your quiet enjoyment on the line. Take note of things that go wrong or awry throughout the year, then meet with a real estate attorney to update your terms as necessary.

Communicate with Friendly Formality

When someone is your neighbor, it’s easy to let formalities as a landlord slip away. However, don’t let casual conversation replace getting things in writing when it comes to your rights as a landlord. Keep things professional and documents, even though, and especially if, your tenant is your neighbor.

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Resources Discussed in This Episode

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Episode Transcript

Bonnie Galam 0:11
Welcome to the House of Horrors Podcast where each week we dissect problems real estate investors have faced, how they navigated it. And of course, what you can do to avoid ending up in their shoes.

Bonnie Galam 0:24
Hey, y’all, it’s your host, Bonnie and we are prepping for the big workshop coming up this Wednesday on October 26, here in Bonnie land. And if you haven’t yet saved your seat, you can do so at bonniegalam.com/profit. Plus just for registering, you’ll get access to my 15 page workshop workbook and asset protection, self assessment. This workshop is unlike anything I’ve ever done before. And it’s super interactive. But most importantly, it’s about profit. No one of us got into real estate investing to sit around and stress all day about getting sued. We bought that first investment property because we had a financial goal in mind. Maybe it was to work last or not at all. Maybe it was to create generational wealth or be able to live anywhere in the world. And so I want my education to be in alignment with your goals. There’s enough snake oil salesmen selling ridiculous asset protection structures, I just want to share a no frills, easy to implement legal and property management, education. And I want to do that through this brand new workshop. I really hope I’ll be seeing you there. We’ve already had hundreds of registrants sign up. And it’s going to be a lot of fun. You can save your seat over at Bonnie galam.com forward slash profit or use the link right in the show notes. And let me tell you that it’s like everything I create for real estate investors, whether it’s this brand new workshop, my legal checklist, guides, this podcast, all of it has been inspired by my experiences, my clients experiences, and my landlord law school students, even you know, people who will come up to me after speaking events, which is really the the nexus of this whole podcast episode. Because ever since I hung my shingle about four years ago now I kept this running list of what problems investors came to me with. And if you’re in my good bones Facebook group, you’ve probably answered that question like What is your number one legal concern going on right now. And one of the problems that stuck out to me early on as an attorney, and it’s kind of been like a consistent theme. Since then, was this feeling of helplessness that house hackers had? And I’m not saying that, like they’re down in the dumps for most house hackers that I know, we’re like, really proud of their investing style and their housing situation and wouldn’t change it for the world. And I’m right here riding alongside that. But when I would stand in front of them and talk about asset protection at a local RIA or something they’d, you know, quietly come up to me at the end of the presentation and say, but what about me? Like, what am I supposed to do like LLC is aren’t in the cards. What else is there for me and whether LLC are in you know, in play because you’re using FHA financing, or do you don’t have enough cash to put 25 or 30% down on a commercial loan product, or you just don’t want to use an LLC, due to like financing cons like having less favorable interest rates, and having favorable loan terms like the length of the loan term that comes along side it like, those are all really valid reasons to be real estate investors without having an LLC. One does not require the other. And so what I saw was that these investors were either writing off asset protection themselves or had attorneys write it off for them saying, there’s nothing else that you can do. And it was in those conversations with House hackers, many of which I’m happy to call friends and clients and students at this point. But that’s what led me to create landlord law school because I realized that investors, not just house hackers, thought that asset protection was an LLC use period, like okay, maybe throw in like a trust or something. But that was it. And so if you weren’t using one of those things, then you just weren’t participating in asset protection. And in reality, though, those types of entities don’t do half of what I think investors expect that they will. They’re almost never used properly. And there’s just so so so much more different things that investors can do especially do on their own without the assistance of an attorney to create like this ecosystem of protection and like maybe it’s other attorneys egos where they’re just like, if I can’t make money off of this advice in some way, then I’m not going to give it to you. Which is a shame because it’s, I think, left a lot of people unnecessarily exposed. And in this episode, we’re going to talk about the way that house hackers can protect themselves, because they seem to have been given the boot by most attorneys. And it’s like, if I don’t have an LLC, or you’re not going to buy one from me, I can’t help you. And that makes me so mad. It makes me so mad because there’s actually, like I said, a ton of things you can be doing to protect your assets, protect your income, protect your time. And today we’re gonna focus on assets. Because I’ve seen how attackers struggle with their options here so much. But even if you’re not a house hacker, maybe you just own properties in your personal name, and you want to learn about like, I will say, LLC alternatives, but like, what else is out there? Or maybe you do have an LLC, and you just want to further tighten up the ship, then stick around, because the three tips I’m going to talk about today will help you cover your tushies. If and when things do hit the fan. And let’s get started right off the bat with my favorite desert island piece of asset protection, which is drumroll please, insurance, y’all. You know, I love insurance. It is such a great bang for your buck. Not only can it pay out like the potential settlement, it will also defend you. Yep, that’s right. Insurance will give you attorneys, I cannot stress this one enough. I’ve had, you know, unfortunately, several clients get sued over the years not always like their fault. Like sometimes you just get brought into things. But in short, they’ll call me and I’m so flattered about that. But they’re like, hey, Bonnie, I think I’m gonna get sued, can you help me with this, and I’m like, hold up before he pays me like some big huge retainer, your insurance might be able to cover this. Now, let me tell you off the bat that there’s a ton of situations out there, that insurance just doesn’t cover it. I’m sorry. Like, just I can off the back of my head, I can tell you like insurance isn’t gonna cover you. Like if there’s a breach of contract. Insurance is not going to cover you in the event of alleged fraud. Insurance is not going to cover you if there’s a partnership dispute, like the list goes on and on. I don’t need to sit there and write all over insurance, it has its limits. But it’s also an incredible bang for your buck. I mean, where else do you get, you know, something that will pay out a settlement and provide you legal defense during the lawsuit, nothing else does. And so that kind of stuff helps maintain what I think of as the most important thing, which is your net worth, we don’t want to be constantly losing more money than we’re making an insurance is a really important way to do that. And I want to talk about two important types of insurance, particularly when it comes to house hackers. The first is homeowners insurance, if you bought this house, that you bought this property with any sort of financing, which frankly, just most house hackers do, I don’t see a lot of cash, cash house hackers out there. But there might be it may just be something that’s particularly difficult to do

Bonnie Galam 7:32
in the Northeast, where I’m located, but even if you did, chances are you’re cashing out like reifying it to pay yourself back. But anyway, homeowners insurance is required if you’ve got any sort of financing on the property, but you should have it anyway. Because again, cheap, great bang for your buck. But a huge caveat that I’ve seen some house hackers kind of miss is disclosing things to your insurance company. Everybody knows insurance companies love to take premiums and hate to pay out on that policy. And so you have to make sure that there’s not a loophole that they’re going to find and say, You know what, you didn’t follow the rules of your policy, we actually don’t have to cover you. And what I’ve seen happen is particularly in house hacking situations where you’re renting by the room, like you’ve got a roommate, as opposed to like multifamily house hackers, where this it’s very obvious, there’s a tenant in the property, there’s multiple units, you’re in one, someone else’s in the other. But two things that I see pop up, the first actually is with the multi family situation, when you leave that property, and then it’s no longer owner occupied. Let your insurance company know that it’s a different rate, it’s going to be more expensive, that’s going to stink, but your insurance is actually going to insure you. And that’s what matters at the end of the day. So if you have an owner occupant policy, you are the owner occupying it, that changes, you move out of that property at some point, let your insurance company know. But the number two situation that I see pop up a lot. And this happens, if you are renting the room, or perhaps you’re using the property as an Airbnb, if you’re traveling a lot when you’re not there, you got to disclose that to your insurance company. And yes, just like when you move out, it is going to cause a bump to your insurance policy. But the good news is, is you’re actually going to be covered for the stuff that like you want to be covered for so if that tenant or that Airbnb guest causes damage, it causes a flood set the place on fire, like whatever the case may be, or they just get hurt on the property like Don’t forget about that bomb. Then the policy is going to cover you and that’s what we want. We don’t pay insurance premium for funsies to check that box off every month like we pay it because we expect to be covered in the event that there’s a problem. But you’ve got to make sure you’re playing the game with the insurance companies. So do things. You’ve got rent for the room. You’ve got Airbnb situations going on. Make sure your insurance company knows that but also yet goes from an owner occupied property to not you got to let them know that as well. The next insurance policy that is really important, and I think, talked about a lot, but I’m not sure how much it’s honestly purchased. Like all its umbrella policies, we all love to talk about them. But I don’t know how many of us actually have them. Like it’s one of those things that’s like, oh, yeah, I could get that. I know, it’d be a good idea to do that. But did you actually ever purchase it? And I have found that the answer is really kind of often No, it’s like perpetually on the to do list but never actually purchased. And umbrella policies are, they’re great, they’re great, they will go in excess of your other personal lines of insurance for things that happen as like personal activity. So that means they will cover you in excess of your insurance policy on your house, they will also cover you in excess of your auto policy. And let me tell you about auto policies, as you guys know, I’ve talked about it before, one of the most common tort lawsuits meaning personal injury type of lawsuits, this stuff from car accidents. I know all the other asset protection attorneys out there love to make it seem like it slips and falls in front of 123 Main Street, which happens to be your property. It’s not. It’s car accidents, guys. And so how do we make sure that the fender bender that happens on the highway doesn’t lead to something happening on your rental property? That is what insurance policies like your auto and then on top of that an umbrella policy can help cover you. Now, the common question that I get, and we go into this a little bit more depth inside of landlord law school, is like how much umbrella should you have. And I think the higher of your net worth or $1 million is like a rule of thumb to go by.

Bonnie Galam 11:47

I kind of made that up in consultation with another client. And the reason for that is for two reasons. So let me just give you an example. So if you have equity in your property it is like 100 or $200,000 equity, and you’ve got 30,000 sitting in the bank. So let’s say net asset value is like 230, we’re gonna round that up to a million dollar policy we want the greater of your net worth or million dollars. And why is that for a few reasons. One, umbrella policies are just cheap. To go from, like $100,000 policy to $500,000 policy to a million dollar policy, you will see those prices just go with a million. And the reason why is because you want it to actually like cover you in excess. And so we’re talking about these catastrophic types of situations, which I mean, once you get a million dollar judgment, that is, you know, statistically far more likely than a $2 million judgment, which is statistically far more likely than like, once you start adding like multiple multiple zeros, like these types of lawsuits are really, really, really rare. Again, I know a lot of asset protection attorneys make it seem like houses are bursting into fire, it was your fault. And you know, everybody’s suing everybody for you know, all these deaths. Like that’s not really what happens most of the time. But having a million dollar judgment, you’d be surprised like a fender bender could lead to you know, hundreds of 1000s of dollars in like personal injury damage. If that person has spine and back injuries. I can tell you myself, I had a car accident, oh gosh, how long ago it was in 2015 was in 2015, we were in a car accident, some guy ran a red light, and we T boned them. But it was their fault because they ran the red light. And I broke a rib. And I had you know, some you know, neck issues, I had to go to PT for several months. And that itself fractured rib PT for several months was over $30,000 judgment that I got from that. And so things add up really quick. Put it that way, the pain and suffering adds up really quick. And so I wouldn’t, you know, do like a $100,000 policy because it doesn’t take much to get there.

Bonnie Galam 13:57
Now, you’re also going to want to make sure that your umbrella policy covers all of your personal assets, you have to disclose them. And that’s, you know, can kind of fall through checks. Like if you’ve got multiple rental properties in your personal name, like talk with your insurance broker, like sometimes these forms are like, What’s your address? Here it is, here’s your auto policy, and then they don’t really push and house hackers aren’t like we’re an unusual circumstance home. Real Estate Investors are unusual. And so push that conversation with your insurance broker to make sure you have the appropriate conversation in the appropriate coverage. Next up, the next thing that is crucial do not pass go crucial is for house hackers is your lease and the lease is the cornerstone of your investing business. Whether you’re a house hacker or not. It’s how you can reliably collect your rent. Enforce that in court and be able to enforce your possessory interest in this property. A it’s also how you set your terms and your policies for appropriate use of that property. And no, that does not belong in a welcome packet it belongs in your lease. And you know, never more do terms and policies get felt more than when you’re living literally next door to your tenant as a house hacker does. Oh, Nellie, you find out you need a tighter pet clause when the tenant shows up with a bird who squawks at night. And your lease just talks about, you know, pet rent kind of generally, or that driveway, you know, it would seem like common sense that the driveway was for, like your car’s not the tenants boat and their RV, but your lease just says driveway is to be shared by both tenants of the property. I have had a lot of fun making things smart actually, like productive leases, with people and especially with House hackers. Because no one knows the quirks, the headaches, better than house hackers. But the key is to like to reflect on that and get that stuff down into your lease. Don’t just write it off as, Oh, this is a pain in the butt tenant who’s going to vacate in a few months, like make sure that never happens again, or there or at any other property with lease terms. Investing in a customized lease is something I recommend every single investor do screw the BiggerPockets one. Don’t use your buddies’ money, please pretend that that few $100 Lawyer fee that you’re going to pay is a home inspector or an appraisal fee. Like these are not things you would ever skip during a transaction. So don’t skip out on this cya stuff after you own the property. And full disclosure, I review and update my list every single year, every single year. Because the laws change, problems may pop up. And Long gone are the days where I’m fooled twice. Like I’m not ashamed to say that like my aliases have, they’re not encyclopedic. Like I don’t want to make it seem like I’m just adding all sorts of nonsense to my laces at all times. But there is constant tightening of languages.

Bonnie Galam 17:05
And that should be something that every investor does. If you obviously don’t have the legal skills to add those terms to your leases, then, you know, pay an attorney for a half hour of their time to be like hey, these are the types of things that went wrong in my businesses. You’re How can we craft these into you know, two or three sentences like these do not need to be page long terms like it’s a little paragraph to be able to kind of prevent these things from happening again. And inside of landlord law school. I have a lease audit and some of my favorite lease terms like punting the plumbing problems that the tenant caused actually to the tenant and midnight lockouts. Maybe it’s just us as you know, student rental owners, where, you know, people are getting drunk and locking themselves out at, you know, midnight or whatever. But we’ve had to get tight on those terms, let me tell you, or at least make it worth our while and I pull back the curtain. I share that stuff with you inside of landlord law school. And speaking of you know, keeping things formal, getting things done, making things legit. Communication, guys, let’s talk about communication for a second. I like to consider my approached friendly formality. With you know, house hackers, though things can swing a little bit too much towards friendly thought, and I kept it like these people, your tenants or your neighbors, and things are going to get set in passing. Things are, you know, things can feel personal. tenants can feel underfoot or in the way and you can feel that way to your tenants. But keeping things formal is really important so you don’t use or lose any important rights. And that can be as simple as sending a quick follow up email note, not a text message, guys, you know that. But if you haven’t listened to Episode 65 of the podcast, where I rant and rave all about why we should not be communicating with our tenants by text message, go back and listen to episode 65. But I get it like I get that it can feel ridiculously obnoxious to communicate with someone, especially a neighbor that way like especially one who you may have a good relationship with. But it’s important that things do not get lost in translation. And I’ve seen that happen frequently. And it’s usually almost always with House hackers, where something gets said in passing and the other party relied on it and perhaps they were mistakenly relied upon, but they did. And so let me give you an example of that. This was a situation where a tenant said in passing to the house hacker that they’re not going to renew the lease. But behind the scenes the lease says that notice has to be given in writing, but that the tenant is entitled to renewals. The landlord then begins to market the property, perhaps even signing a new lease. As time goes by, before the actual renewal deadline heads this was like a 30 day renewal Well, and it was like 6570 days out where the tenant says this to the landlord. But in that time before the 30 day renewal deadline, the tenant realizes that maybe they actually can’t find a better place, and they like to stick around. And so they tell the landlord, actually, I’m gonna stay, we’re going to renew this bad boy. And this may sound crazy, right? But I can tell you, it happened to a client of mine. And it was a really tough pill to swallow. Because not only was the tenant going to pay, the new tenant was going to pay a lot more money. But the current tenant was right. They had a renewal, right. And we kind of had to unwind the other, you know, supposedly incoming tenant situation.

Bonnie Galam 20:46
And it was something that thankfully, you know, worked out pretty well, in the end. I mean, it was frustrating to go through it, but like, nobody, you know, ended up loitering up and it didn’t turn into a fight. It was, you know, there was definitely some frustration. And now there’s, you know, extra frustration and resentment, because you’re living next to this person who you felt kind of screwed you over a little bit. But it’s really important. That was like, the classic example to me, of how things just sometimes get set in passing. And it can spiral from there. And these types of situations just happen more with House hackers, because you’re just around your tenants more by nature. And sometimes you bump into them, and things are sad. And so things look like if someone says, Hey, I picked a sign for your FedEx package like that doesn’t need to be moralized, like, use your common sense. Use your best judgment here. But in the situation that I just described, like, what would I have done there? I probably would have said something like, told the tenant, like, Hey, can you just shoot me an email real quick confirming that you don’t want to renew so I have that for my records, boom, done. Not too socially awkward, right, like, and I think everyone involved probably would have gotten that in the moment. But there was still this gray, it wasn’t even a gray area, it was just the reality. Like they didn’t follow the protocols of the lease, the landlord didn’t really go by that. And they ended up in this pickle. But I think that also kind of shows you that sometimes asset protection isn’t always about someone coming after you. Sometimes you just want to avoid stepping in it, you know, and that goes, whether you’re a house hacker or not, you know, and in some like when entities are off the table, either by necessity or by choice, like you’ve got to use other types of asset protection. And that means using defensive tools. And you know, in this situation, I think with House hackers, insurance is the best way to go. But also balance that with offensive tools like nip that like drip, drip drip of wasted money and like headaches that just sometimes feel better on autopilot as a landlord, and definitely feel a little bit more personal when you’re living with your tenants. And so, if you would like to go deeper with me on ways that you as a landlord can increase your cash flow without adding more properties and also decrease those legal headaches. Then I invite you to join me in the workshop happening this Wednesday, you can save your seat at Bonnie galam.com forward slash profit. And make sure to subscribe so you don’t miss next week’s episode, which is all about what your real estate attorney leaves on the table. I will be pulling back the curtain a bit on my own industry and it’s gonna be a bit spicy, guys. You’re not gonna miss it. But that is it for this week’s episode. I’ll see you here at the same time, same place next week, and I hope to see you at the workshop. Bye for now.



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I'm a self-managing landlord, generational wealth evangelist, self-education obsessed course creator, automation avenger, book worm, Sixers fan, semi-retired real estate attorney and momma to two tiny hummusapiens. 

I believe that time is the most valuable currency, but money is a close second. I fight against the bad rap landlords get while still pushing the industry to improve. 

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This is not a law firm. Nothing on this site should be construed as legal advice. Bonnie does not provide you or your company legal advice. We simply provide legal information and education for you to customize and use on your own and have reviewed by your own local attorney. Bonnie is an attorney licensed in NJ and PA, but is not practicing law or establishing an attorney-client relationship with you, ever through Bonnie Galam LLC. Some states may consider this attorney advertising (although it isn't intended to be). Thank you!

This is not a law firm. Nothing on this site should be construed as legal advice. Bonnie does not provide you or your company legal advice. We simply provide legal information and education for you to customize and use on your own and have reviewed by your own local attorney. Bonnie is an attorney licensed in NJ and PA, but is not practicing law or establishing an attorney-client relationship with you, ever through Bonnie Galam LLC. Some states may consider this attorney advertising (although it isn't intended to be). Thank you!

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