Self management questions

16 Replies

Hello all, I hope someone can help answer a few questions for me.  I have had 2 rental properties for 10+ years and have used a property manager for the entire time since I live several hours away from them.  In May, I purchased another SF home and I have a 4th SF home scheduled to close next month.  These last two houses are within 2 miles of my home so I want to self manage them.  My questions are:

Should I create a separate LLC management company and do I need to be licensed to do so?

All properties are owned in my name and husbands name but have an umbrella policy to reduce risk-no LLC.........thoughts?

What is a good resource for a lease agreement, tenant screening and rent collection?

Other than a minimum credit score what other specific stipulations can I legally make to help get the best tenant possible?

Thanks in advance for all your help!!

Obviously, you'll want to visit with your lawyer to get advice on those questions, but here is how we do it:

We have an LLC that is a property management company. That management company has an operating agreement with our other LLC, which owns our property, we are simply employees of the management company and that is how we present ourselves to our tenants.

Beyond the legal protections that this structure offers, it makes interactions with tenants so much simpler. It's much easier to get rent increases, collect late payments, etc, when you are just representing the owner and not putting yourself in a position where a tenant thinks they can negotiate with you. You're just an employee doing your job.

As for a lease, I'd find a local real estate investors club and ask others to share theirs. Your lawyer might have a good one too- that is a good route to go, since your lawyer will likely be handling any issues, they will be familiar with the lease and comfortable enforcing it.

We also have an umbrella policy- they're cheap and offer a little more peace of mind.

As for tenant screening, depends on your neighborhood. We have a minimum credit score, no felons, 3X rent for income, etc. BUT- the most telling screening for us is checking people out on social media. That will tell you much more than any application will. And of course, we call every landlord they've listed on their application.

For rent collection, we use cozy.co, it's free for landlords (and tenants if they use a checking account) and is direct deposit. You don't have to wait for rent in the mail, and you know immediately if rent is late and can add that on to their required payment. You have to wait a few days for your deposit, but you're notified that it's on the way immediately, and it's well worth it to avoid fighting for on time payments, waiting for the mail and arguing about late payments. I'll never accept a personal check for rent again.

Finally, make sure your application includes banking info and SS#. If you ever have to find them and collect on a judgment, that info will be infinitely helpful.

Best of luck to you!

Thank you @Corby Goade This is exactly the kind of info I was hoping for. It is too late for me to structure ownership via LLC with a separate management LLC because I already own them privately and if i transfer it I think I may lose my title protection from what I read on here. Do you think I should still create the management company? Then I could still present myself as an employee and have the other benefits you mentioned.

I will def. use the criteria for tenant screening and application info you mentioned.  The social media thing was already on my mind too!  Thank you so much for your input!

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Hi @Wendy Carbone !

I have had a mgt co since day one and it's been a real blessing. Completely agree with @Corby Goade about it making the tenant interactions easier, especially with apt buildings for me. Having rents payable to one entity that's not you and it being separate from your personal acct is an additional multi-benefit.

I also own my little residential houses in my personal name, and have my mgt co as the landlord or mgt co. Whether you do mgt as an LLC or S-corp, I would elect to be taxed as a corp for IRS purposes. The income will be 'actively' earned and corps have not dealing with self-employment tax benefits.

You are right that transferring houses from your name to an LLC can cause a lot of problems. I plan to do so properly when my houses are paid off.

Congrats on your decision to self-manage your backyard properties and best wishes! 

@Steve Vaughan Thanks for the reply! Regarding your comment about transferring to an LLC when your houses are paid off, why does that make a difference? My first two properties are paid in full so I am curious. Good point too about avoiding self employment tax by filing as an S-corp....I will look into that! Next step for me is seeing if I can create an S corp today!

@Wendy Carbone ,

Re: Ownership ...

Remember that even with an umbrella policy, your personal possessions are exposed.

When savvy professional litigants (lawsuit-equivalents to professional tenants) see multiple properties in your name rather than a trust or an LLC they know there's probably an umbrella policy to go after and, if not, the owner's personal assets. So, unlike multiple corporate veils which are deterrents, umbrella policies actually invite litigation.

Remember also that if an umbrella policy pays out, it means litigation was brought and you lost.

I'm sure @Steve Vaughan will mention that when there's no longer a lender involved you can transfer a property into an entity with no issues regarding Due on Sale.

Originally posted by @Wendy Carbone :

@Steve Vaughan Thanks for the reply! Regarding your comment about transferring to an LLC when your houses are paid off, why does that make a difference? My first two properties are paid in full so I am curious. Good point too about avoiding self employment tax by filing as an S-corp....I will look into that! Next step for me is seeing if I can create an S corp today!

That's great you have free and clear houses, Wendy! Do you plan to ever leverage them for more RE purchases? If not, (and they're not sub-$50k houses or something) I would consider placing them properly in an LLC for anonymity and asset protection. When I don't have to deal with the less favorable terms of financing an LLC or about DOS clause violations, I will do it in baskets of value. Say, each $1M worth of houses may be in this LLC, the next million in another. That's how I do my commercial apt buildings, but the cap there I have raised to $2M each.

I have quite a bit of leverage on my houses now while I'm paying off my apt buildings. I will swoop in and pay off my houses in massive chunks soon, especially my older mortgages in the 6%+ range. I've considered 'encumburing' them with my own entity financing at that point as an LLC alternative, but I am early in researching that method.

Regarding creating an s corp today - you first establish a c corp with the state, then elect to be an s with the IRS.  You probably know that, but thought I would mention it.  Congrats again on building real wealth!

@Steve Vaughan thanks for the kind words. Those first two properties were not stellar investments - we have a large family and at the time only 1 steady income and a side hustle. We were scraping together a down payment and when we had 10% we bought the first townhouse for 54k at 7.75% int rate. The second townhouse we scraped together 20% down to avoid PMI and approached the owner of another unit in that same building and bought it off market for 48k at 5.5% int rate. Unfortunately 10 years later they are each worth about 60k and rent for 575/mo each. So long story short the side hustle generated enough to get these paid off and gave us leftover money to keep going. I really just want to dump them and reinvest locally but hard to sell them with tenants inside. I currently have one listed with a tenant on month to month but realtors are not motivated to show because the tenant requires 48 hr notice. 3rd property is single family near me that I took out a 15 year mortgage with 25% down 3.75% 140k and my son rents it for 900/mo with a plan to sell to him in 3 years. 4th house is single family 30 year mortgage at 3.75% SP 148k will rent for 1100-1200/mo. I have been fairly conservative and know these are not amazing investments but still better than a savings or cd.

@David Dachtera   Thanks, I never thought of it that way.  It's terrible that from the get go we have to plan to protect from someone trying to sue us for all we have but unfortunately that's how it is these days!  I am looking more into veiling my assets.

@Account Closed , I don't lie to my tenants. I work for a property management company, if they asked if I owned it, I'd tell them. No one has ever asked, most tenants don't care. And yes, social media, it's one of the best tools out there- I am not digging through comments to see if their ex mother in law is mad that the applicant didn't like her cooking. If a tenant tells me that they like to keep to themselves and are quiet, but all of their photos have them partying and smoking weed, then I pass. And that happens fairly often. I've learned more from looking at a facebook profile for five minutes than their application can tell me, both good and bad.

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Not to start yet another "LLC or not?" fire, but one thing to keep in mind with an LLC or any other type of legal entity: they can be time consuming and/or expensive to maintain properly. And if they aren't maintained properly those super savvy lawyers everyone is warning you about will bust them apart in an instant. Then whoever the owner is will be on the hook just as if they owned them personally.

There are also significant tax implications for operating as an employee of an entity rather than an investor. Talk to a CPA who specializes in REI before doing anything, and have a lawyer who specializes in Corporate Law set up your entities for you. The DIY entity websites are a waste of time and money (at least in my state.)

Personally, I own my properties in my name, my tenants all know who I am (self-manage), and I carry an excess liability policy. Maybe the fact that my tenants all drive WAY nicer cars than me is a deterrent...guess nobody wants to sue me for my $1500 minivan.

Good luck!