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Build a backyard rental unit 

There are several ways to add a rental unit to your property, including a freestanding ADU building. Other options include the conversion of a garage or existing interior space, or building an addition to your home. Whether you choose to rent your ADU, live in it yourself and rent out your main home, or offer short-term vacation rentals (via VRBO or AirBnB), the extra income from an ADU is attractive. 

But an ADU is an investment and being a landlord requires a learning curve and presents certain risks. And while an ADU will increase your property value, your property taxes may rise as well. 

Protecting a real estate business

As soon as you sign your first Lease Agreement with a tenant, you expose yourself to potential legal and financial risks. It’s important to protect your investment from costly disputes with tenants and other unexpected pitfalls. As a sole proprietor, you can be held personally liable for a wrongful eviction, personal injury or other legal claims while renting.

You can shield your personal assets from potential legal actions — whether you rent out multiple properties or just a single ADU — by registering your rental business as an LLC. Without protection, you risk being held personally liable for disputes that could lead to a loss of personal assets. An LLC also protects you from personal responsibility for business debts, while providing you with certain tax benefits.

You may also want to look into landlord liability insurance, which goes above and beyond the coverage provided by your homeowner’s insurance policy. For instance, this insurance policy protects you from liability when tenants damage your property or they sustain injuries.  

Take the next steps:

  1. Register your business.
    Whether you’re renting out several apartments or a single ADU, put your rental business in the best position to succeed by registering an LLC. With a Rocket Legal+ membership, your first business registration filing is FREE (excluding state fees). 
  2. Rocket Sign your Lease Agreements.
    Save yourself time and hassle, while making the storage and access of signed Lease Agreements a breeze with Rocket Sign. Want more convenience, with the Rocket Lawyer mobile app, you can get legal help on any device, any time.
  3. Get everything legal all in one place.
    Save time, customize your contracts, and get peace of mind with attorney-vetted Rocket Lawyer documents. If you have legal or tax questions, reach out to a Rocket Lawyer network attorney for affordable legal advice.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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