Managing Investment Property - Better to have the expense or not?

[Kate Barry]

Hi All

I am a Realtor as well as investor, and we have a property management company as well.  I am looking to invest with partner on some potential deals that will require a PM, and I'm wondering what the pros and cons are in terms of the financial strategy to charging management fees when partners are involved.  I'm considering just taking more equity of the property in exchange for managing it, but I wanted to ask the community here what else there is to consider when doing this.  The plan is to refinance in 5-7 years, so my thought is that its better to show more cash flow without having the 10% management fee on the top to be able to do this. 

[Corby Goade]

Quote from @Kate Barry:

Hi All

I am a Realtor as well as investor, and we have a property management company as well.  I am looking to invest with partner on some potential deals that will require a PM, and I'm wondering what the pros and cons are in terms of the financial strategy to charging management fees when partners are involved.  I'm considering just taking more equity of the property in exchange for managing it, but I wanted to ask the community here what else there is to consider when doing this.  The plan is to refinance in 5-7 years, so my thought is that its better to show more cash flow without having the 10% management fee on the top to be able to do this. 

 Great question- I am dealing with something similar now and learning about some of the nuance that I hadn't considered before. I am definitely not an accountant, but here is my scenario, something to consider; when you own a property management company and manage your own properties for free, the IRS could view that as not treating your own investments as a business venture- ie; would you manage someone else's properties for free? So- that theoretically could pierce your corporate veil and create liability for you and your partner. 

On the flip side- if you do charge yourself that fee, you are converting passive income to actuve income on the PM side, which defeats the entire purpose of what you are trying to do. 

What we are doing to mitigate that is "self managing" our personal rentals, keeping them out of our PM company from a financial and legal standpoipnt. Obviously we use the same lease (different landlord name on it, of course) but separate banking accounts and books. It's more work for sure, but worth the tax savings and maintaing that LLC protection.

Hope that helps!