LLC to manage my properties. Do I need a contract between myself and my LLC?

Question

HI All,

We recently scaled up our rental portfolio from 1 to 10 homes. One is in my name and 9 are in my and my wife's name. Two are fully paid off, one is almost paid off, and rest have significant principals left on the mortgage.

7 houses are currently rented and have lease contract with me and my wife. 6 renters are paying rent to us directly and a third party property management company is managing the 7th property. 3 houses are recently purchased and are listed for rent.

I have already created an LLC and opened a bank account in its name. I want to use this LLC as an operations/management LLC to manage my properties (all except one which has a third party property management).

Where I am stuck is that how I need to make transition from self to LLC for managing the properties. Few questions in my mind are:

1. Does me and my wife need to write a contract with the LLC (we both are the only members of the LLC) requesting the LLC to manage the houses going forward

2. Do I need to update the lease documents to change the contract from our names to the LLC name?

3. Should we make the transition now of wait it January 1st (to help with keeping the tax accounting clear?

4. Should I start paying the mortgages from the new LLC for draw money out to the members and pay mortgage from our accounts?

I will really appreciate if you can provide any guidance on the above questions and any other pointers. I have read a number of previous posts but I am still not clear on the actual steps.

Thanks a lot in advance.

Scott Nachitilo · Answer

Hi Sartaj, congrats on scaling your portfolio! Transitioning to an LLC is smart, but keep titles/deeds in your names (transferring could trigger mortgage "due-on-sale" clauses). To answer your questions:

• Yes, sign a management agreement between yourselves (owners) and the LLC. This formalizes duties, fees (even if nominal), and liability separation.
• Update leases to show the LLC as "Manager" or "Agent," but retain ownership in your personal names. Notify tenants of payment/direction changes.
• Transition now, but document everything. Waiting until January simplifies bookkeeping, but consistency matters more than the calendar date.
• Pay expenses through the LLC: Collect rents into the LLC account, pay operating costs (maintenance, management fees, insurance), then distribute profits to yourselves as owner draws. Pay mortgages personally from those draws to avoid lender issues.

Keep meticulous records separating LLC/personal funds. Consult a Texas real estate attorney for proper guidance to draft your management agreement and review lease language. Also, notify your insurer about the LLC’s role.

Disclaimer: This information is provided for general informational purposes only and does not constitute legal advice. Consult a qualified Texas real estate attorney and your lender before making any decisions regarding the transfer of property or management agreements. Individual circumstances may vary, and professional guidance is strongly recommended.

Aaron Zimmerman · Answer

On the tax side of things, you're effectively moving money from one pocket to another. However, the pocket you're moving it to has potential self employment tax consequences.

what id consider is:

1. can you make the management LLC have just one member? This way, you avoid an annual filing of form 1065 and instead goes on schedule c. This will save some money.

2. Do you have any kids that can help with the management of the properties that you're managing within the LLC?

Aaron Zimmerman · Answer

@Sartaj G. Buying a vehicle for business purposes for one rental would be a bit of a hard sell. You could deduct mileage to start.

for REPS, you'd ideally want to have your wife be in a real estate business such as realtor and then her manage the rental properties. Much easier to qualify for reps but I'd work with a cpa to help determine which hours count and which hours don't.

theres not necessarily a minimum age but something reasonable. I would think a 12 year old could be capable of doing bookkeeping

Jason Malabute · Answer

One way to simplify things is by making the management LLC single-member, which avoids the need to file a separate partnership return

Aaron Zimmerman · Answer

@Sartaj G. On the LLC being a single member, you'd want to show your cpa the ein letter as it'll say if you need to file a 1065 or not.

LLC or not, your wife, if she manages, could benefit from all of these without an LLC. You can also pay your child out of the rental property as opposed to the LLC. What you don't want to do is:

1. Have substantial management fee income that gets taxed as self employment

2. have substantial losses on the management company as the irs could disallow them if you're not running it like A busines.

You can pay your child out of the property if they do legitimate work on the property. You'd want to document their position and hourly rate. Things like cleanups, bookkeeping, smaller tasks are perfect.

Sartaj G. · Answer

Hi Michael,

Thanks for your note. I need to educate myself on the self employment taxes with LLC.

My intent is not to create income from the property management LLC. Main intent is to keep the accounting for rentals clean: Send the rents to LLC and charge expenses (e.g., insurance, maintenance, property taxes, home office, other related write-offs, etc.) related to rental business to the LLC. Send the remaining money to me and my wife and pay mortgage with that from our personal accounts.

Can I run LLC with no profit (or loss)? if yes then there should be now income so no taxes?

Another point, I have a W-2 income (spouse is stay at home mom) where I am already above the social security tax income limit. Since LLC will be a disregarded entity, I think I will not need to pay additional social security tax (might still have to pay 2.9% medicare tax?). Looks like I need to find an accountant competent in Real Estate Investing accounting. Thanks.

Michael Murphy · Answer

OK.  I think I misinterpreted things in your first post.  If it's just to keep the books clean you can run the income and expenses through the LLC bank account with no problem.  All your P&Ls would show up on your Schedule E on a property-by-property basis.  You could also set up another personal bank account and run everything through that and accomplish the same thing.

The issue is that you don't want to create management fee income at the LLC.  Rental income gets excluded from SE tax, but management fee income would be subject to SE tax.  For example, if you write up a formal contract with the LLC to manage the properties and you say that you are going to charge the property 5% of gross rents as a management fee it would be a problem.  I really don't see the benefit of writing out formal management contracts with the LLC to begin with.

You could theoretically run certain expenses through the LLC to offset management income, but it won't be necessary if you don't create it in the first place.

Also, on you prior question about when to start running transactions through the LLC, I don't think it matters.  If you wait until January 1 or start now it will be the same amount of work.  For this year's taxes you will just need to record all the transactions from your personal accounts and then record the transactions from the LLC.

I would just pay the mortgage from the LLC too.  The bank shouldn't care as long as they are getting paid and you aren't changing the name on the deed.  If the goal is to keep the books clean then run everything through the LLC that you possibly can.

As far as getting an accountant involved, it wouldn't hurt.  It sounds like you have enough income / assets to justify the expense of getting a consultation.

Stuart Udis · Answer

@Sartaj G. What is the motivation behind the operating LLC? What you are proposing provides absolutely no liability protection whatsoever and with 10 units the revenues don't justify the management arm. You are merely adding expenses to your operation.

Michael Murphy · Answer

If you run property management income through an LLC you are going to get hit with self employment tax.  What is the impetuous for creating the property management company?

You might look at an S Corp instead of an LLC to mitigate the SE tax.

LLC to manage my properties. Do I need a contract between myself and my LLC?

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