Good or bad idea? Property management firm for my own properties.

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Good or bad idea? Property management firm for my own properties.

Paul Teske
Member since 2019 · 4 posts · 2 votes

Hey BP,

I'm considering starting a property management firm that will only deal with my own rental units. This company will not own the rentals, because I do not want to trigger the Payment Due on Sale clause in the mortgage; the properties will remain legally in my name for now. The primary goals are to keep the properties' books separate from my personal finances while also projecting a professional image that wouldn't be accomplished had everything been in my name. Other legal protections afforded by the LLC are a bonus, but I fully realize that I can be sued as long as the property is in my name. I wanted to ask anyone else who has done this how it worked out. Any pointers would be appreciated; I can't find much info about this.

This is in Florida. I will be drawing a salary (not commission), and will not manage properties that I do not own - therefore no need for a broker's license. I am fully aware of the extra paperwork and costs that come with LLC ownership. Forming the LLC is part of my long-term business strategy. Eventually, the LLC will also own the properties, but that's not an option at this moment.

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Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
7y

If you set up 123 LLC as your management company, how is that separating the finances? Rent goes to 123 LLC but then 123 LLC has to pay those funds out to the owner (you). So the money is still yours, still in your account. It's just adding a middle-man (the LLC owned and operated by you) to your operation. You'll still have to discipline yourself to keep funds separated from personal, which can be done by setting up a new bank account called "Teske Rentals".

As for professionalism, I think you're looking at it wrong. An individual can be professional and an LLC can be unprofessional. Your business card with logo may give people a perception of professionalism at the beginning but true professionalism is demonstrated by how you operate.

You asked if it's a bad idea and I think it is. Setting up an LLC to manage your own rentals doesn't make you a professional. It also doesn't add any additional layer of separation between personal and business finances because the LLC does not keep the finances. It sounds like you want to create work for yourself so you can give people the impression you're working. Why not just do actual work? It's like saying you want to show people you're a long-distance bike racer so you hop on a stationary bike at the local gym and start pedaling away. People may initially be impressed but they'll soon realize you're just pretending to race and not actually going anywhere.

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  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    7y

    I would find an attorney and explain what you're trying to do because this doesn't make sense. Your liability remains because you are the property owner. Also, the property owner is always liable for the actions of the Property Manager so that doesn't add any layer of protection. You're essentially setting up an LLC so you can collect rent under a different name?

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  • Paul Teske
    OP
    Member since 2019 · 4 posts · 2 votes
    7y
    Originally posted by @Nathan Gesner:

    ... You're essentially setting up an LLC so you can collect rent under a different name?

    Not solely for that purpose. My main goal is to separate the finances and project a more professional image. Down the road this company would take ownership of the properties, so it's also part of my longer term strategy. 

    Edit: The fundamental goal is to better separate the business from my personal life. 

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    7y

    I established a mgt co S-corp a year in 16 years ago and am glad I did.

    I did it to have a higher authority to check with, anonymity (no rents or 1099s in my name) and retirement plan options.  

    I also have a central entity for generic expense tax purposes. I more easily track all mileage, buy supplies like light bulbs, batteries, cleaning stuff, grass seed, icemelt, etc through.   

    I have the right but not obligation to charge myself a mgt fee. Some years it works better for me to earn active income, some not. I like having the what-if options. Its generally not smart to take passive rental income and turn it into salaried SE income but may make sense for specific purposes like funding a solo 401 or IRA.

    Mine has a very generic sounding name so it wears many hats.  Basically any active income side hustle I do like consulting, wholesaling, self-incumbering a free and clear, lending, etc all go through my scorp which owns nothing.  

    Talk to a tax and legal pro about what type of entity, LLC or S-corp , is best for you if any.

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  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    7y

    If you set up 123 LLC as your management company, how is that separating the finances? Rent goes to 123 LLC but then 123 LLC has to pay those funds out to the owner (you). So the money is still yours, still in your account. It's just adding a middle-man (the LLC owned and operated by you) to your operation. You'll still have to discipline yourself to keep funds separated from personal, which can be done by setting up a new bank account called "Teske Rentals".

    As for professionalism, I think you're looking at it wrong. An individual can be professional and an LLC can be unprofessional. Your business card with logo may give people a perception of professionalism at the beginning but true professionalism is demonstrated by how you operate.

    You asked if it's a bad idea and I think it is. Setting up an LLC to manage your own rentals doesn't make you a professional. It also doesn't add any additional layer of separation between personal and business finances because the LLC does not keep the finances. It sounds like you want to create work for yourself so you can give people the impression you're working. Why not just do actual work? It's like saying you want to show people you're a long-distance bike racer so you hop on a stationary bike at the local gym and start pedaling away. People may initially be impressed but they'll soon realize you're just pretending to race and not actually going anywhere.

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  • Scott SmithPro Member
    Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
    7y

    @Paul Teske To achieve the desired result that I believe you are looking for. It may make sense to have a Traditional LLC as the operating company (property management firm) and then another strategy for asset protection for holding your rental properties. This is a common strategy that I help my clients to set up. There are way to move properties into asset holding companies that will not trigger a due on sale that you may want to explore due as moving the properties into a trust.

    A transfer to an LLC will trigger the clause and should therefore be avoided, even though banks are hesitant to ever foreclose as long as the note is being paid. Even with the note being paid, the banks will still send threatening letters. This issue can be avoided completely by transferring the property into a land trust.

    While a transfer to an LLC will cause alarms at the bank and prompt them to send you a letter, a transfer to a trust will not. A transfer to a trust is exempt from due on sale violations since banks will view transfers to a trust as an estate planning tool. You should not even receive a letter from the bank.

    This article can explain the general process of taking a property into your own name and transferring it into the Land Trust before assigning it to the LLC. The added benefit of this process is that you can also have your attorney sign the public records as "Nominee Trustee" before assigning yourself as the "Trustee" once the Trust has been established. It means your name does not appear on public record for that property. You will still appear on most LLCs without additional steps being taken, but you can make the land trust appear anonymous with this strategy while getting access to the funding you are looking for.

    This isn't legal advice, just my opinion as a real estate investor.  If you have more questions please leave a reply or Dm me.  Always happy to help. 

    - Scott

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  • Steve RozenbergPro Member
    Specialist · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    @Paul Teske 

    I dont think it is a good or bad idea... I think you may want to ask yourself why you are doing it. creating a business can be a very hard and indepth task as well as very time consuming. The question I would ask myself is whats the goal of creating a company to do this and is this the best use of my time? and am i really the most qualified person to be the CEO of this business, or is it better to hold someone else accountable and I can go do what I would rather be spending my time on..

    It is like instead of buying a ticket on an airplane to go on vacation to Hawaii, you take flying lessons and learn to fly to do it yourself... (not completely the same but you get my thoughts)

    You may want to find a PM company and hold them to a higher standard so that you can do whatever you want to do... See if there is anyone out there that shares your goals and vision and ask the tough questions upfront.

    I would look up NARPM and start with them..Below are some questions I would think would be a good starting point for you to see who really treats their company like a business or a hobby.

    Questions to Ask prospective management companies

    • What are your average days on market for vacant homes?
    • What is your average rent amount for all properties managed?
    • What is your average work order cost for the owner?
    • What is your average make ready cost for the owner?
    • Are all my invoices uploaded to my owner portal?
    • How do you advertise your vacant units?
    • Do I receive video of my pre and post make ready?
    • Do you have a setup fee?
    • Do you upcharge on maintenance?
    • When do you make owner payments? How often?
    • Are you a Certified Property Manager?
    • Are you a member of NARPM?
    • What is your Guarantee?
    • Do you provide move in and move out reports
    • How many pictures do you take of the property prior to tenant moves in and after the tenant moves out
    • Do you get weekly reports when the property is vacant what prospective tenants are saying about your home
    • Do you provide monthly newsletters to your tenants
    • Do you hold investor education classes to help me become a better investor
    • Do you have single point portfolio based management services?
    • How many properties do the owners actually own themselves?
    • What do you do to ensure that the tenant is responsible for security deposit disputes since that is the largest reason for owner lawsuits
    • How familiar are you with the newly changed laws that can affect you the owner if they are not used correctly?
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