Should I start a property management company?

Question

We own and self manage three rental properties. Two of them are in Kentucky and one in Florida. We would only plan to manage our own properties.

Would there be any tax advantages to starting our own property management company?

Drew Sygit · Answer

@Tony Thomas no advantages that come even close to covering all the expenses and paperwork headaches!

What MAY make sense is to setup a Master LLC that operates like a PMC and collects all your rents, pays all your property-related expenses, etc.

The owner of each property (you, LLC, trust, IRA, ect.) would have to execute a management contract with the Master LLC, so the Master LLC could legally act on behalf of the property owner(s).

Check with Account Closed about all this, but also an attorney!

Stuart Udis · Answer

@Tony Thomas Even though it does not appear there are any meaningful tax advantages, I believe the lesson to be learned here is to focus on making business decisions that are best for the real estate and operation of that real estate. If there happens to be tax benefits available, that's gravy.  I often see investors obsess over tax advantages and tax strategies and lose sight of why they are making the underlying investment or whether the operational decisions are sound. The investors who focus too much attention on tax strategies are usually the investors who are distracted which leads to bad decision making. Very few are in financial positions where tax strategies should be prioritized in their real estate business outside of perhaps timing and tax consequences of selling real estate.

Now applying this to your property management scenario (even if there were meaningful tax benefits available)..... How are you self managing your current portfolio given the properties are located in Kentucky and Florida? That part has me stumped. Property management is generally regarded within the real estate industry as a loss leader. You have to reach incredible scale to obtain the efficiencies to make it financially worthwhile. Most who operate property management companies profit off of ancillary businesses that are interconnected such as brokerage services, construction etc. rather than the actual property management.

I can only see the benefit of forming a self performing property management company if you believe you can be more effective on cost and service than the local 3rd property operators and even cost can be tricky to calculate because most focus on the management fee that's charged rather than the cost to put out fires when they do arise. Often the PM company has in house technicians who can complete work order requests for far less and in less time than the property owner who has to call the local plumber to resolve a leaking sink. Most fail to factor this in.

I believe the fact no meaningful tax advantages exist saved you from going down a rabbit hole that would have been adverse to your business more generally.

Basit Siddiqi · Answer

I would only suggest a property management company set up if you are not working for an employer and are interested in retirement account contributions + deducting health insurance costs.If you are already working for an employer who is providing a retirment account plan + subsidizing health insurance costs, in my opinion, no point in setting it up.

Ashish Acharya · Answer

@Tony Thomas Starting a property management company to manage your own properties could offer some tax advantages, but there are important factors to consider. By forming a property management company, you could deduct business expenses like office supplies, software, and possibly a home office, which you wouldn’t otherwise be able to claim.

You could also potentially pay yourself a salary through the company, which could create retirement plan opportunities, such as contributing to a solo 401(k) or SEP IRA. However, this approach might add complexity, such as additional tax filings, self-employment taxes, and administrative costs. To see significant tax saving, the management income has to be significant so.

The bottom line is that PM would be for more legal reasons and not for tax reasons.  This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Sean O'Keefe · Answer

I'd say the best answer is from @Stuart Udis on this..

.

Tony Thomas · Answer

Thank you!

Audrey Scott · Answer

For most situations, there are no significant tax advantages to starting a property management company if you only manage your own properties. The income and expenses would likely be treated the same as if you managed them directly. However, it's always recommended to consult with a tax professional to get advice specific to your situation.

Account Closed · Answer

thanks for the shoutout Drew!

Account Closed · Answer

Hey Tony,

There are definitely several tax advantages to starting your own property management company. First, it could help you qualify as a real estate professional (REP), or at least make it easier to qualify, which would allow you to offset passive losses from your rental properties against your active income. This could lead to significant tax savings, especially if you're actively involved in the management and operations of your properties.Additionally, starting a property management company would allow you to deduct a wide range of business expenses related to managing your properties, such as office supplies, travel, marketing, and payroll (if you hire help). These expenses would lower your taxable income and further reduce your overall tax liability. It would also give you more control and flexibility in how you manage your properties while ensuring you can take full advantage of tax deductions available to businesses.

Jason Malabute · Answer

There are indeed several tax advantages to starting your own property management company. First, it could help you qualify as a real estate professional, which allows for greater tax deductions on your real estate activities. Second, running a management company would enable you to deduct a wider range of business expenses, such as office supplies, travel, and marketing expenses related to managing your properties.

Another big advantage is that, as a property management company owner, you’ll have first contact with a lot of distressed owners who might be open to selling their properties. This could present great investment opportunities. And if you take them out for lunch or drinks to discuss their property, you can deduct those meals as business expenses too.

If you have children and currently give them allowances, you could also consider employing them through the property management company. This way, their allowance becomes wages, which can be deductible as business expenses.

However, keep in mind that many property management company owners report that margins are often tight, especially if you’re only managing your own properties. So while there are tax advantages, running the company itself might not be highly profitable on its own.

Should I start a property management company?

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