Property management when starting out?

Question

James Wise · Answer

Friendly disagree with this. In my opinion the most important piece to the real estate investment puzzle is the ability to use the banks money.

You can put 10 residential mortgages in your name. You cannot beat the 30 year mortgage. It is by far the best financing in the world. Creating an LLC from the get go and purchasing properties through it would exclude you from utilizing this financing.

I run a $40 Million portfolio in the Cleveland area & I can tell you even at that scale the risk of a life changing lawsuit is incredibly low, especially if you are acting like a responsible property owner. If you do things by the book, provide habitable housing and insure yourself you should be fine. If you are just starting out with a few houses there is absolutely no reason to skip out on the ability to finance a great little portfolio because of liability fear.

Joe Splitrock · Answer

@Joshua Matowitz you can still expense your management costs exactly the same with or without an LLC. An LLC provides legal protection, not really tax advantage.

If you plan to do property management for others, then yes you should start an LLC to do that. If you are just planning to manage your own properties for the foreseeable future, then no there is no reason to get an LLC. You can setup an LLC in the future easily if plans change.

My general advice starting out with your first couple properties is that do not need an LLC. It just adds complexity and cost. There is annual filing and extra tax work involved. More importantly, people buying properties with conventional financing have to purchase in their personal name, so the LLC has no use. Before someone responds to my post and tells you to just quit claim the deed into the LLC, here is the problem with that:

1. Your mortgage has a clause that says not to do this and that your loan can be called if you do this (this does happen).

2. Your mortgage and insurance will remain in your personal name. This makes it very hard to claim that the LLC owns the property and not you personally. By mixing personal with the LLC, any attorney could easily claim the LLC is just a shell and that you do personally own the property.

James Wise · Answer

You are simply trading one risk for another greater risk. In your mind you have created an extra layer of litigation protection but to accomplish this you have hovered around mortgage fraud & added a risk of the loan being called. This is dangerous advise to give to novice investors.

Kyle R. · Answer

Friendly disagreement. Don't rush into creating a LLC. Do your research and find which state you should file in, along with which LLC structure is most beneficial to you. A generic LLC will not fully protect you. I paid nearly $2K to set up my LLC and it was worth every penny.

Steve Vaughan · Answer

Due on sale isn't the real risk here - it's your insurance.

Joshua F, both hazard insurance and title insurance are in your name.  You are the beneficiary, but you no longer own it.  In the name of asset protection you are uninsured and have f'd up your title chain with a qcd.  Congrats!

Anywho- to the title question by the OP- I established my own mgt s-corp from the get-go and I really like it.  I did an s-corp because all activity inside it is 'active' and I can establish a defined benefit retirement plan or solo 401k with it.  It owns nothing, like Ryan's.  I don't know how people do it otherwise, receiving rent checks and deposits and everything in their own name.  I vote for the s-corp!

Ryan Murdock · Answer

I recently created a property management LLC simply to act as a "management company" for my own portfolio. The LLC owns nothing and really does nothing aside from be a single number, website, address, and name on an office door that any of my tenants can contact. It can get pretty clunky when you have several LLC's that own different properties plus stuff in your own personal name.  Corralling it all under one property management LLC streamlined everything.

If at some point I decide I want to pick up an outside management client again I simply add the appropriate liability insurance to my property management LLC and the rest of the infrastructure is already in place.

Laticia Braxton · Answer

Hello Joshua.  I would advise that if you are planning to manage other people's investment properties, you absolutely get the LLC set up as you will then have a legitimate business.  You will also need the incorporation documents to set up your business bank accounts.  Lastly, you will also need to get GL & E&O insurances for the business.

Craig Bellot · Answer

If you know for sure you want to own and operate your property management company then by all means register an LLC for it.

However in my experience most new investors don't know where they will be in the next five years.

My advice would be to do it yourself for a while till you know if you like managing property or not.  If not you can hand off to another company.

Else you will be filing many state forms and corporate tax returns for little return. Since the major benefit of the LLC is asset protection,  you won't be needing that much in the beginning starting out with our own properties.

There are also additional state fees that run into the hundreds of dollars in Connecticut just for having an LLC filed.

Josh Teunissen · Answer

As a newbie, I too have thought about starting a property management company, however, for me the goal would be to build relationships with potential sellers, as well as have the systems in place to more efficiently run my personal property(ies). And hopefully reach a size where I don't personally have to screen and answer calls haha idk if that's a pipe dream

Joshua Feit · Answer

@James Wise You're right, and I'm right too. Just because you have an LLC doesn't mean you finance properties through it.

I finance in my own name, and when the dust settles, I quit-claim over to the LLC. Sure, there is an acceleration clause to think about, but I have never run into any problems, and I don't know any investors who have ever run into trouble with the bank calling the loan due.

LLCs are easy to set up, and I think it is good form to have one.

Cheers, Josh

Property management when starting out?

Most Popular Reply