I have been looking around and cannot find a clear answer/discussion on the topic, but does anyone have experience with self managing through their own property management company?
I see many people marketing their self owned/managed properties as a company for example: call Jay at JT Properties, make checks payable to JT Properties etc. This is not an outside property management company.
Does it make sense to set up a separate business entity to manage your own properties through?
For someone who only plans to invest in 5-10 properties does it make sense to just have a generic email address, and have checks made out to you personally?
For the record I am just starting to investigate small multifamily properties in my area, looking through the biggerpockets forums, following the blogs of other investors etc.
I do this. I created a PM company solely to manage my own portfolio. Having one name, phone number, email address, biz card, etc is easier than trying to explain the different LLC's that each of my properties are under. I used to run a PM company managing for others and it's set up exactly the same way except now my only clients (with extremely limited exception) are my own properties.
If you only want to invest in 5-10 properties, it may be overkill to set up an LLC just to act as a PM company. You not only have the annual fillings and costs associated with running an LLC, you are also transferring part of your passive income (rental) into active income (property management), which pays more taxes (consult with a CPA, but one told me this a couple of years ago).
If you are planing on buying those 5-10 Properties under an LLC, used that same LLC to manage them; no need to create another one.
@Mackenzie S. I do this as well, but we manage more than 30 properties in the Bridgeport CT area. Although it will give you more asset protection if you set up a separate entity, it is more paperwork and administration intensive.
From an asset protection perspective, your asset holding entity should be separate from your property management and operations entity.
Holding LLC is just keeping title to the property (how many properties per LLC is depending on a series of questions - look into Series-LLC if your state has them). Ideally with a layer of anonymity provided by a land trust. No public interfacing, nor operations. It has a property management contract with the Operations LLC.
Your Operations LLC is the public facing one - it does the repairs, hiring the contractors, dealing with leases and tenants. It has minimal capital reserves.
For tax purposes, you can treat them as disregarded entities and all net flows to you.
Yes, the administration is more involved than having everything in your name, but you need proper bookkeeping anyway.
PM me and I can send you my notes on asset protection (primarily for buy and hold investors) that includes entity structuring, protecting the corporate veil, transferring and due-on-sale clause, when to do it, checklists, etc.
I agree with the replies above. Creating a management company if you have below 10 properties may be too much.
The property management company may be required to file its own tax return(if its not a single member LLC). You also may be transferring income that is passive rental income to active ordinary income that may be subject to self-employment tax.
@Basit Siddiqi can you please elaborate a bit on the statement: "You also may be transferring income that is passive rental income to active ordinary income that may be subject to self-employment tax." ? How/when/why would that happen? Thanks.
@Mackenzie S. I can go over the pros and cons because this is how we are currently doing it.
This is based on my discussions with our outside counsel, insurance agent and accountant. But I'm none of those people. I'm in investor / developer. So, please make sure you get advice from experts in these fields. What I'm writing is here is through my own personal experience.
Cons (I will go over cons first because this set up has been painful!):
1. The rent flow is tedious. It will go to the property management company and then to the individual LLCs. Unfortunately, that's just more work!
2. I was just told I needed the property management company to be insured - it is also our construction management company.
3. I still would end up filing taxes for the property management LLC (which essentially hasn't made any money) as well as the holding LLCs if they are in partnership.
1. Branding is easier like you just mentioned.
2. If your holding LLCs are single owners, they may be disregarded entities. Some thing to check on.
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