So currently we have a number of duplexes being held each in its own LLC, with separate bank accounts and everything. I feel that before this venture gets too large, that I should create a Property Management LLC to be the "face" of the business. This is the name that I will use to answer calls, post rental signs, use in all paperwork to the tenants, etc. Then each of the buildings are like separate owners for which I am managing.
How do I handle the logistics of this? What is the best way to do the accounting? Have the tenants send rent to the PM and then the PM will send the income minus a property mgmt fee to each of the building LLCs? All or some expenses run through the PM and offset the income? For specifics, I can check with my CPA and RE lawyer, but they aren't experienced Property Managers. :-)
Anyone else use a PM company to handle all of their rentals set up this way? Any words of wisdom would be awesome!
You're on the right track Beth, in my opinion separate LLC's for every property is a little overkill but you should have a separate entity for the PM, not necessarily an LLC. That is exactly how I do it. I suggest a good business attorney with real estate experience and a good CPA with real estate experience. I started with the right attorney but had the wrong CPA, in my first 2 years the CPA undid half the things the attorney had set up for me and now, several years later I have a better CPA and I'm having to restructure my entities very similar to the way the attorney originally planned. That CPA cost me extra money then and now he's costing me extra money again... choose your team wisely.
@Beth L. Which software are you using? I agree with Dick. Right real estate CPA and Attorney is a must. We have heard many different stories as well. Just make sure if one of them asks you to make a major change, get a second opinion - money well spend.
Here is our system for QuickBooks clients - create one file for property management business. All money received from the tenant and money spend on the properties should go through this company with exceptions such as capital improvement and mortgages. Then at the end of the month you should take the summary from the property management company and enter it to the LLC files.
I have seen more of S-Corp rather then an LLC. One of the benefit amount others with S-corp you can take a paycheck. Yes there will be payroll expense and tax return fee, but in the end it is beneficial.
@Dick Rosen Thanks for your input!
@Gita Faust I am currently using Quicken Rental and have each account set up separately within the program. This works for us, since the LLCs flow through our personal return. I categorize each entry as to which property it relates to and the reports it prints works well for our CPA.
I guess I'm just trying to figure out the best process now, before I get into it and then need to change it.
Like @Gita Faust
said, I think an S-Corp is a better option for the management business. I to use QuickBooks with "Classes" turned on. In your case each LLC would be a class and then the property would be a sub-class under the LLC. A separate QB file for the management company or you could probably do it as a separate main class so everything flowed together in reports.
The accounting part is fairly simple if you set it up right, just make sure you have your entities set up correctly, by the advice of both your attorney and CPA.
@Beth L. To tell you the truth we started using Quicken in 2000 and found many workarounds, and was time consuming. We had to filter reports, well needless to say, we too switched.
Processes are the same for all software, enter invoice, receive payments and pay bills. There is ONLY ONE main reason, I would not use Quicken for rentals: security deposit. I have spoken with Quicken developers @ Intuit and they know about couple issues we found, but it is not on their top of the list.
@Gita Faust What was your issue with security deposits? I set mine up in Quicken as security deposit liabilities since they reside in their own bank accounts anyway. However, when I had to keep a security deposit recently, I transferred it to the main rental checking account and it only logs as an account transfer and I don't see how I can make it now show up as rental income. Or do I have to show it as rental income if it is offsetting damage to the property? I haven't taken the time to figure out how I should do this yet. Thanks for your comments. I appreciate it.
According to my accountant, security deposits are income when you receive them and an expense when you pay them back. IE, you have to book them as revenue when they are received, you can't hold them in a separate account and not recognize the revenue. I simply book them as rental income with I receive them and then if I pay one back it's an expense. On a separate spreadsheet I keep track of what deposit I have on file for what unit. The deposit info is also contained in the lease document.
Security deposits are generally not treated as income. IRS Topic 414. http://www.irs.gov/taxtopics/tc414.html
Here in Maryland, it is the law to keep the security deposit in a separate account and it has to be paid back with 3% interest. It is considered a liability and is therefore not considered rental income when you receive it.
I haven't had to keep a security deposit before so, thank you Chris. This IRS document is very clear. I do deduct the cost of repairs as expenses (shouldn't we all?!?) so I need to include this security deposit as income for the year.
My initial question was how to do this within Quicken Rental, since I am just transferring the funds from one account to the other. Any experienced Quicken Rental users out there that could advise on that?
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