Starting a PM company to Handle my rental property

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Starting a PM company to Handle my rental property

Jared Chipkin
Littleton, CO · Member since 2014 · 39 posts · 5 votes

I currently own one rental property (plan on purchasing many more) I would also like to start a property management company that takes care of everything. 

What is the best way to set this up?

I purchased the first house under my name as I am just starting out. In the future I will purchase them in an LLC.

I was planning on setting up the PM company to be single owner LLC under my name, but my fiance is also available to be owner if it makes more sense.

I assume I would have the tenants pay everything to the PM company and have the PM company bill me for repairs (that I perform or hire others to perform)

Another part of the equation is that I make about 100k a yr at my full time job so I am hoping these investments substancially lower my personal tax burden. (My fiance is currently unemployed.)

Please let me know if anyone has experience with setting something like this up and what you would recommend.

Thank you!

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Harrison Smith
Real Estate Agent · Biddeford, ME · Member since 2017 · 213 posts · 150 votes
9y

@Jared Chipkin Here are some of my thoughts on this and how my company has structured the PM company.

1. I am assuming your current job is not in real estate. Due to that, your tax advantages are limited due to the passive nature of your investing. I would recommend putting the PM entity in your fiance's name and have her be the lead on that. Once you are married, you could file jointly and she would be able to claim status as a Real Estate Professional. This would allow all of your losses to flow through, without limitations due to them being passive. I would consult a CPA, but your maximum tax benefits lie in the ability to claim status as a real estate professional, which you won't be able to do while continuing in your job but she could if she was dedicated to working in real estate (agent, PM, investor, etc.). 

2. The PM company should collect all rents, pay all expenses, bill you for repairs like any other customer, collects its fees (% of rent, placement fees, turnover fees) then remit to you the remainder (profit). You can have that remitted to the LLC that holds the asset and use that money to pay future bills, draw for yourself, or invest in additional properties. Keeping the businesses separate and treating yourself like a customer will help make this work much easier.

Hope this helps. Let me know if you have any questions. 

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  • Scott Innocente
    Real Estate Agent · Windsor, Ontario · Member since 2017 · 835 posts · 214 votes
    9y
    Good question. I’m thinking of doing the same. Hopefully someone can offer some advice!
    0Reply
  • Harrison Smith
    Real Estate Agent · Biddeford, ME · Member since 2017 · 213 posts · 150 votes
    9y

    @Jared Chipkin Here are some of my thoughts on this and how my company has structured the PM company.

    1. I am assuming your current job is not in real estate. Due to that, your tax advantages are limited due to the passive nature of your investing. I would recommend putting the PM entity in your fiance's name and have her be the lead on that. Once you are married, you could file jointly and she would be able to claim status as a Real Estate Professional. This would allow all of your losses to flow through, without limitations due to them being passive. I would consult a CPA, but your maximum tax benefits lie in the ability to claim status as a real estate professional, which you won't be able to do while continuing in your job but she could if she was dedicated to working in real estate (agent, PM, investor, etc.). 

    2. The PM company should collect all rents, pay all expenses, bill you for repairs like any other customer, collects its fees (% of rent, placement fees, turnover fees) then remit to you the remainder (profit). You can have that remitted to the LLC that holds the asset and use that money to pay future bills, draw for yourself, or invest in additional properties. Keeping the businesses separate and treating yourself like a customer will help make this work much easier.

    Hope this helps. Let me know if you have any questions. 

    5Reply
  • Jared Chipkin
    OP
    Littleton, CO · Member since 2014 · 39 posts · 5 votes
    9y

    @Harrison Smith Thank you for your insights!  

    The PM side does make sense to set it up as you described...

    I was hoping that having the property in my name and having the job outside of the REA industry, I would be able to claim losses on the rental side that would mitigate the taxes on the job side.  I will set up to meet with a local CPA.  

    0Reply
  • Harrison Smith
    Real Estate Agent · Biddeford, ME · Member since 2017 · 213 posts · 150 votes
    9y

    @Jared Chipkin You will be able to mitigate some of your income with losses on the rental side, but the amount you can recognize is limited due to the job and the passive nature of the investment. The ability to utilize those losses also begins to phase out at certain income levels, so there are other things to consider as well. A CPA should clarify how much you can expect to recognize, but having a spouse with the REP designation is a completely game changer. 

    0Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    9y

    @Jared Chipkin

    It may be beneficial to set up the property management company to be taxed as a S-Corp to save on payroll Tax. 
    However, your savings may be limited because your W-2 income is around $100,000.
    The Social Security Wage base in 2017 is $118,500
    The Social Security wage base in 2018 is expected to be around $130,000

    When your W-2 income + property management company income exceeds the Social security Wage base - you would only be saving on medicare tax.

    You would have to weigh the option to get an entity with the cost of tax return compliance and overall paperwork to the savings of the S-corp.

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    1Reply
  • Jared Chipkin
    OP
    Littleton, CO · Member since 2014 · 39 posts · 5 votes
    9y

    @Basit Siddiqi The S-Corp idea is one that I hadn't considered. I will do some more research on that  (and talk to a CPA). 

    I didn't realize that the Social Security wage base was so close to what I am making at the job. Perhaps it does make sense to just put everything in my name - the LLC and the property.

    The less hassle and paperwork the better, even if it cost a little extra.  The 9-5 (or should I say 6-6) typically has me working 60-70hrs a week. 

    Thanks for the info!

    0Reply
  • Jared Chipkin
    OP
    Littleton, CO · Member since 2014 · 39 posts · 5 votes
    9y

    Thanks @Harrison Smith, I have a meeting set up with a local CPA.  I also would love to work with @Linda Weygant who was recently featured on the BP Podcast! I'm sure she is too busy for a one on one meeting though. 

    0Reply
  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    Hi @Jared Chipkin - I'm not currently taking on new clients as I am trying to clear a backlog of work.  However, I hope to have that backlog cleared by the end of October and will be reaching back out to folks in early November who have reached out to me.

    Podcast Guest on Show #244
    2Reply
  • Jarrod Kohl
    Boston, MA · Member since 2017 · 209 posts · 126 votes
    9y

    One thing to research is licensing.  I am not sure about Colorado but in many states, you need to have a RE Broker licenses to run a property management company, unless they are all your properties.

    3Reply
  • Marian Smith
    Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes
    9y
    Texas, too. So your fiancé would need a license. I just added "Properties" to my last name...don't have to file a dba if it is your name in Texas. Set up a separate business checking account to deposit rent and pay bills. Thats it. The main thing is to set up procedures and have forms. For example, I use zillow rental manager and have a standard screen I use before agreeing to show the property. I have an application, tenant selection criteria, lease, lease extension, late notice, etc ready to use. Saves time. Steve Crossland PM has a blog and reading his posts will give you a good idea of the mindset of a good PM. Best!
    0Reply
  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
    9y

    @Jared Chipkin , you need to be licensed in Colorado in order to manage properties for other people. I'm not sure the grey area that happens when you own the property in an LLC. Contact DORA to see if you can manage properties owned by an entity without a license. I would think you could, but could not manage for anyone else without the license.

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    0Reply
  • Jared Chipkin
    OP
    Littleton, CO · Member since 2014 · 39 posts · 5 votes
    9y

    Good call @Jarrod Kohl and @Mindy Jensen on the RE licensing.  I just assumed that you could manage your own properties under a PM company. I will definitely look in to the regulations in regaurds to this. 

    0Reply
  • Jared Chipkin
    OP
    Littleton, CO · Member since 2014 · 39 posts · 5 votes
    9y

    @Marian Smith good to know for any Texans reading this post. I will be doing some more research for Colorado,  

    The information that you posted on various applications to make sure the PM business acts as a real business is key. I have started using Cozy for tenant screening/rent payment which has worked great so far.  Apache Open Office for Bookkeeping and  NCH Suite for creating invoices.  The last two programs are pretty basic, but free! Cozy is also basically free.  The lease agreements are most important and I heard that BP has pre made lease agreements ready to go (at least for CO). I ended up just tweaking a template that I found for Colorado, but realized that it did have a few flaws.

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    9y

    From day 1 I established a mgt co s-corp to manage my own portfolio.

    I use it very little the way you are outlining, though.

    I do not want to take beautiful SE-free passive income and turn it into active income.  But that's just me.

    I do like having the validity and anonymity of receiving rent payable to a corp vs myself.  I like  my multi tenants thinking I'm just a working stiff.  I like the retirement contribution option what-ifs I can play at year end.  I can earn if I want and fund a solo 401k, etc.     I can stick like $30k into a defined benefit pension plan and reduce that years income dollar for dollar if I want to earn that much in the first place.  Never have.  Again, I don't like SE.

    Be sure to discuss s-corp options with your CPA @Jared Chipkin.

    1Reply
  • Dan Schwartz
    Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
    9y
    @Steve Vaughan does your management entity take a management fee before remitting the balance to the owning entities (including yourself)?
    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    9y
    Originally posted by @Dan Schwartz:

    @Steve Vaughan does your management entity take a management fee before remitting the balance to the owning entities (including yourself)?

     I'm not real rigid about it, but kind of.  What I  mean is, all rents have always been payable to the mgt co.  It sits there in the s-corp's bank accts.  I don't do and have never done (but could do) monthly 'owner' draws aside from a couple LLCs that hold my commercial apt buildings.  Those are auto drafted to fund op expenses and debt service.

    I am certain nobody else does it my way. I don't pay much attention to getting the cash-flow into my hands or my name.  When the 'retained earnings' build up to $30-60k or so, I buy again or pay off another of my higher rate mortgages directly from one of the corp bank accts.

    I have mgt agreements with all properties, giving me the right to but not the necessity to withhold a mgt fee.  At EOY I decide which is better - paying a bunch of mgt fees to myself and taking on SE income so I can fund a retirement vehicle, or keep it passive by having low/no mgt fees.  Usually its the latter.  I like choices and what-if analysis depending on my tax/income position EOY.   

    Again, I am almost positive nobody else does this and because of that any further discussion will just confuse people.

    0Reply
  • Dan Schwartz
    Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
    9y
    @Steve Vaughan thanks so much for the reply. "right to but not the necessity to withhold a mgt fee" is a perfect clause. I've been loathe to take 8-10% of gross income off of schedule e and put in on schedule c, but the "right to but not necessity" is great. Sometimes it would make sense, sometimes it wouldn't. Thanks!
    1Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    9y

    Thanks for going easy on me and not prodding further @Dan Schwartz.

    It's because I do a lot of things so much differently than most with entities and how I receive or don't receive my cash-flow, yet am not qualified as an attorney or tax pro to explain or advise why I do them that I don't do podcasts, quizzes, blogging, etc.  Cheers!

    1Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    9y

    I like the idea or being able to set up a SOLO 401K. That can help you build a nice nest egg for the future. Purchasing in an LLC may be more difficult if seeking purchase money. I don't mess with banks because they take too long and are time consuming. I use private funds which are generally fast but above market rates. However, there is a LOT less paperwork and formalities. If you purchase under your name with a mortgage, and then transfer the assets, you may get a due on sale demand. Get advice from you CPA on the best way to structure for tax benefits.

    Thanks @Steve Vaughan for confusing the heck out of me. I am studying for my brokers exam next week and don't need MORE confusing ideas:)

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    9y

     Anytime, John:)  If I wasn't asked, I wouldn't have expounded at all of course.

    I just reserve the right to receive my portfolio rental income as mgt fees or not and don't decide until year-end.  This year I will most likely report very little in mgt fees (active SE-taxed income) because I sold 2 10-yr rentals.  

    A buyer of a 3rd one i could only give an option to buy after Jan 1 so I don't get up into a new bracket.  The last thing I need is more income to worry about this year, so I will most likely report very little 'mgt income'.  Or I may report $30k and put it all into a retirement plan, reducing the income dollar for dollar while giving my rentals higher 'expenses'.  We'll see.

    It's nice to have options and be able to play what-if at tax time.  I doubt any of this will be on your broker's exam.  Only big picture people would ever consider not getting every dollar of cash-flow possible into their hot little hands, waiting instead to see how it will impact their tax burden for that year.

    1Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    9y

    @Steve Vaughan

    No that would not be on a brokers exam. I have been qualified to take it for some time but everything keeps getting in the way. Now it is time! Scheduled for 10 days out but changed that to next week because I am scoring high on the online test and want to pass before that info goes stale in my head. But, as usual, my addiction to BP sidetracks me from studying all the time--like now for instance:)

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    9y
    Originally posted by @John Thedford:

    @Steve Vaughan

    No that would not be on a brokers exam. I have been qualified to take it for some time but everything keeps getting in the way. Now it is time! Scheduled for 10 days out but changed that to next week because I am scoring high on the online test and want to pass before that info goes stale in my head. But, as usual, my addiction to BP sidetracks me from studying all the time--like now for instance:)

     I'm curious, John (since you are wasting time on BP as I am:) does any of the broker test info required relate to RE investing?  Owning, lending, receiving passive rental or interest income?  Building a portfolio of anything but listing and buying transactional prospects?

    I'm amazed at how few 'real estate professionals' know anything about building something real and investing as principals.  I took the sales agent test, but chose not to get licensed and hang it somewhere.  Is the broker's test any better in the investing regard? 

    1Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    9y

    We are required to take post licensing which includes aspects of investing. If you send me an email I can send you a screenshot of the various aspects of the test and what is covered in the test in generalities.

    0Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    9y

    @Steve Vaughan

    this is what the broker test consists of. 

  • Broker Math and Investment 
  • Financing and Valuation
  • Licensure Requirements, Florida Law and FREC Rules 
  • Principles and Federal Laws 
  • Closing Transactions, Contracts and Escrow Management 
  • Brokerage Entities, Ownership, Management and Relationships 
1Reply
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