I want to run something by the community regarding property management and see if others have done something similar:
I'm in the process of figuring out how best to setup the legal structure for a long-term, buy-n-hold rental operation in New Hampshire. After consulting many professionals, and weighing many factors, my plan was to create per-property "holding" LLCs, and a single "property management and acquisitions" LLC to operate everything.
When explaining this plan to my insurance agent, he pointed out that if I formed a property management LLC, that entity would require it's own liability policy whose annual cost would be more than trivial. He also explained that in NH, the owners of rental property are able to manage their own properties without a license, and in the event a lawsuit was brought against them (or the holding LLC) due to property-management related issues, they would be covered via the property's liability policy. In other words, the owner/manager does not need an additional liability policy just for the management function, so long as there's no PM LLC entity.
This all sounds good, in that it's one less LLC and will save a non-trivial amount of money each year thanks to not needing the additional PM policy. However, I was also planning to use the Property Management LLC as the "face of the business". This is the entity that tenants would make checks out to. This is the entity that would have a website, and maybe a logo for business cards, envelopes, letter-head, etc.. When I explained this to my insurance agent, he suggested that I simply create a trade-name (or DBA), and use that as said entity. This would allow me to have the "operating entity" or "face of the business" that I desire, and still not need the expensive liability policy that's required if this entity is instead an LLC.
Does this seem like a sound way to go?
My goal is not to save a few bucks by skimping on insurance; Again, my understanding is that the additional PM LLC policy is going to cost several thousand dollars a year and bring little (or no) additional benefit.
Thanks in advance for any comments!
It's great that you've gone over this scenario with your insurance agent. You should also talk to your attorney (how well does this entity structure protect you from lawsuits by grumpy tenants?), your accountant (what are the tax ramifications of this set-up? How do different types of entities play into the tax picture?) and your funding source (how does your lender consider lending to different types of entities?)...... I've often felt it would make a lot of sense to get at least three of these characters in the same room together when weighing up your entity structure because what makes sense for one of them might not for the other three and so on. Think about it. :)
I am a buy and hold investor in NH. I'll share how we do it, for what it's worth:
Similar to your proposal, I keep the properties in LLCs and then have one LLC for property management. This additional LLC has the PM software (I use Buildium), pays the employees, collects the rent, makes the repairs, and is the company to which utilities and contractors bill. It pays the office expenses, owns the truck (well, it leases it from me because I was able to get a 1.6% interest rate personally rather than a 7% if the business bought the truck), owns the trailers, tools, etc. Currently that PM LLC also owns several rentals. However, starting in 2015 I intend to create a new LLC to take over this role that will not own any properties. It will charge a PM fee to all of the other entities, and I will then take my draws from those proceeds.
All of the properties are owned in LLC's. HOWEVER (and this is big), we do not have individual LLC's for each property. That would cost a TON, due to annual state registration fees, and ESPECIALLY tax prep fees from the accountant, because each LLC partnership would need its own 1065 filed (if it is a single-member LLC it is a direct pass-through to your 1040, but it will still likely increase the accountant's workload and therefore add to the tax prep cost). On a side note, I have been told that single-member LLC's offer no additional protection than just owning the properties in your own name. Not sure if that opinion is NH-specific or not. Anyway, I'm still undecided on that, and therefore plan to stick with LLC's until I vet that opinion more fully and come to a final conclusion (if possible - which when it comes to legal issues, absolute conclusiveness is rarely truly possible).
Okay, back to before the tangent: We used to have the philosophy of having 1 LLC per every 5 properties. However, that is getting cumbersome and expensive, so I plan to make it 10 properties per LLC moving forward. There are specific considerations that go into this decision though: My focus is on single-families (at least right now), and the liability risks are less than in multi-families. Therefore, like your agent said, a $1M liability policy on the property (plus another $1M policy umbrella) is likely going to cover any liability risk exposure you might face. If I were to move into multi-families or commercial properties, I would reassess my strategy and probably go with individual LLC's (or at least fewer properties per LLC).
One more thing: I don't understand the additional insurance cost for the PM LLC. All of our properties are covered under 2 commercial policies. The reason for 2 is because the ones with mortgages need a $1K deductible, and the ones owned F&C have a $10K deductible. (I'm strongly considering self-insuring many of the ones that are owned F&C, and going with a liability-only policy, but that's an entirely different discussion.) The PM LLC is on that policy already because it owns properties. I pay an additional $500 per year to cover my tools and equipment, and another $200 per year to cover a "non-owned vehicle" (so that if my employee is driving to make a repair and is on the clock and gets into an accident, I'm covered if the plaintiff's lawyer goes after my company).
I'll have to double-check with my insurance agent about the cost implications of forming a new PM LLC, but I don't expect it to be thousands of dollars in additional liability coverage. Right now (and again I have to double-check), I foresee it as a policy endorsement adding an "additional insured", at no extra cost. I'll try to remember to post my findings once I speak with him (hopefully today).
Thanks for the quick responses.
Richard, I have spoken with all the professionals you mentioned and have considered many options. I agree that getting them all in a room together, along with my insurance agent would make lots of sense, and save me a ton of time!
Troy, thanks for sharing how you've set things up - It sounds very similar to what I was planning to do (I'm planning to use Buildium too). In my case, I don't think the PM LLC was going to own property, but I'm not sure that matters with regards to the PM policy being discussed. In response to your second post, I'm not sure I fully understand the need for this PM policy either. Originally, my insurance agent thought this additional policy would only be needed if our PM LLC was managing other people's properties. This made sense to me and our plan was to only manage our own properties so I thought I was going to be all set. However, after he researched this, he determined the policy was needed even if we managed just our own properties. My understanding is that this entity would be viewed no differently than a regular property management company (like I might hire if I wasn't doing it myself), and such a company would be required (or recommended) to carry it's own policy.
In regards to the cost of this PM policy, my agent indicated there would be an application I would need to fill out in to order to get a quote, and the cost of the policy would depend on my past experience managing similar properties, etc. We didn’t actually go through this process, but he estimated it would probably end up costing around $3000 per year. I like your “additional insured at no extra cost” idea - I’m going to run that by my guy too and see what he thinks. Will report back….
@Troy Zsofka @Chuck Mace If you are both managing properties that you own, you do not have to have a separate GL and/or E&O policy for the PM entity. BUT you could still run into issues if a lawsuit is brought against the property's LLC and your PM entity that the tenants wrote the checks to. The PM would not have a GL policy that would respond to the claim. Adding the PM llc as an additional insured to each property policy would solve this issue at little to no cost.
If you were also taking on the management of properties of others, then yes, you would want to get the additional policies in order to be covered from claims from the property owners that are the PM clients.
I just got off the phone with my agent. In January, when I set up my new LLC to solely manage our properties, it will be added as an additional insured at no extra cost. That is confirmed.
Here is how my commercial policy is structured. Let's forget for a moment that there are 2 policies due to the differing deductibles, and let's just concentrate on the larger policy - the one with the free and clear properties at $10K deductibles:
-Each property has a premium that covers property and liability. The property portion has the $10K deductible, the liability portion has NO deductible. The same is true for the smaller policy; only difference is the $1K deductible vs $10K.
-I pay another $500 for the tools and equipment coverage that is part of this policy
-That's it, there is no other premium for any other coverage.
-My truck insurance (which also has the non-owned vehicle coverage) is a separate policy
-My workers comp policy is through a different carrier and will not be affected by my decision to open a PM only company (other than the fact that the policy will transfer to that new company because that company will become the employer - but there will be no additional cost).
I do not manage other people's properties, and I do not do any work for hire whatsoever. That is why I do not need additional coverage. If my new company were to manage or work on other people's properties, then yes, it would require additional coverage. However, the same would apply if the current company that owns properties AND manages them were to do work on or manage other people's properties. So, the decision to have a separate company for management only has no effect on insurance coverage costs.
My agent does only commercial insurance policies. Our primary residences are handled through another agent in his agency that does personal lines. It is possible that other agents, who are less familiar with commercial policies, set things up differently, perhaps disadvantageously to the investor (because they are trying to use vehicles with which they are familiar as a solution to a need for which those vehicles were not designed). Our previous agency handled mostly personal lines, and when we switched to our current agent, we saved significantly on premium.
I would be happy to give you his name and contact info if you are interested in a second opinion. Send me a private message with your email address if so.
The other option is to "self-insure", meaning get liability-only policies and have no coverage for damage to the property (other than that provided through your tenants' renter's policies). That is something I am strongly considering doing on the properties that don't have mortgages (can't do it on encumbered properties because the mortgagees require that their collateral be insured, understandably so). However, I wouldn't recommend this until you have a sizable portfolio that spreads the risk. Regardless, I don't think that applies to our consideration of whether or not having a separate LLC for management purposes should incur additional insurance costs. After consulting my agent, I can confidently and conclusively say that it should not (unless he is incorrect, which would surprise me given his specialized level of knowledge).
Thanks for all the great info!
I heard back from my insurance agent on this too, and he had the following to say:
"When the property management company is listed on the policy they are listed as an Additional Insured. An Additional Insured does not get all the same coverages as the named insured."
He said his underwriter explained that if there was a large enough claim, the additional insured status would not protect the PM LLC.
I have no idea what the "right" answer is - I'm in way over my head....
@Chuck Mace I think what your agent and his/her underwriter is trying to say is the additional insured (AI) status does not give the PM broad coverage.
Here is what the AI it does and does not do.
It does cover the PM on any claims associated with the properties. So a slip and fall, a fire where they claim you did not maintain the smoke detector etc.
It does not cover the PM against claims such as discrimination, work comp, or Auto claims which can all be present when managing properties. But these are not GL claims, hence not needing to get an additional GL policy.
Hopefully this adds some clarity and not more complexity:)
Are the leases written between the tenant and the management LLC, or the tenant and LLC that owns the property?
Do you have a written agreement between the management LLC and each LLC that owns properties that describes how and when funds are split?
Do you keep security deposits in the management LLC?
I have the leases between the tenant and property ownership entity, and that entity also holds the deposits. However, I don't know conclusively that this is the best way to do it; I haven't run that by my attorney.
We do have written management agreements, but since it's all the same ownership, they're pretty basic.
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