Creating Your Own PM Company

11 Replies

Hello BP Community!

I wanted to get some opinions on creating a property management company for our rental properties. I have heard of people owning properties and then creating a PM company that "manages" their properties. I guess the question that I have is what are the pro's in doing that? The only thing I can come up with is that because your income properties are paying for a "PM" company, the NI will be lowered for tax purposes at the end of the year? We, like everybody else, are always trying to come up with ways to pay lower taxes and thought this might be an option. If anybody else has any insight into why this would be a good idea it would be greatly appreciated.

Thanks again.

I have an s-corp that manages my properties for me, but taxes have nothing to do with it.  I would consult a tax professional.  S-corps and LLCs are pass-through for the most part and have minimal tax advantages.  

I also considered doing this. I ultimately decided against it based on my states laws. In Kentucky you must be a licensed agent to manage property that you do not own. The fees associated with the process of getting licensed made me a bit reluctant as I did not plan to be an active agent. And you would have to hang your license with a broker, and I'm sure they would want something from your business to make it worth their while. One way that I have gotten around this is by master-leasing a multifamily property and subleasing the individual units. I self manage my properties with an LLC and have additional umbrella insurance.

I have heard of this strategy also I look to employ it once I get enough properties.

As already stated, there are multiple benefits of owning your own company. I have devoted part of my company to doing this duty. 

Also, in my state to be a bonifided PM/ PM company, one must either be RE broker, and or either serve as supervision or a broker of record; alternatively, if one would have a company that performed a myriad of duties and one such duty happens to be the management of property, let's say passive management, then I don't see the BRE having a problem with that company. 

BTW, having insurance when operating a business is a must and we'll worth it. My Insurance agent clearly understood our company and what it is we do and selected the best policy for us.

2016 will be the year that I can quantify the efforts with ROI.

BUT! I am not a lawyer and I provide no legal advice.

Our PM is a simple pass through LLC. As long as we own the properties, at least in FL, then no licensing is required. Can't imagine Alabama is much different, but do check.

I believe I recently read on the forum here that you may not be able to represent yourself in small claims court if you were to do this? If the tenant was to sue you there? Perhaps that's just with an LLC?

It's bedtime, so I'm vague on my memory of this, but you might want to check that out, too.

Otherwise, you can still deduct for a home office, which includes the percentage of your home used for it, which would be that percentage off your mortgage, insurance, maintenance, utilities, etc., as well as your other business expenses.  It almost seems like these deductions would be better than if you were to pay a PM.  But, I'm no tax expert.  I've taken home office deductions in the past, though, and they're pretty sweet.

Originally posted by @Sue K. :

I believe I recently read on the forum here that you may not be able to represent yourself in small claims court if you were to do this? If the tenant was to sue you there? Perhaps that's just with an LLC?

It's bedtime, so I'm vague on my memory of this, but you might want to check that out, too.

Otherwise, you can still deduct for a home office, which includes the percentage of your home used for it, which would be that percentage off your mortgage, insurance, maintenance, utilities, etc., etc.

 Think it's state dependant. Haven't had any problems here.

We are not taking any deductions for a home office. Nothing. Wife who trained as a cpa many years ago is adamant that it creates more problems than it solves. I seem to remember her saying something like home office expenditure is an audit red flag as well. Plus, on a personal level, our business expenses are kept away from our home. Our home is sacrosanct.

This is a great question for @Brandon Turner

 I know he wrote an article about this one time but I can't find the article now. But he said he creates a legal entity for the property such as "ABC properties" but its not a real property management company, its just a asset management company that manages his own assets. but I'm sure he could explain better. 

Originally posted by @James DeRoest :
Originally posted by @Sue Kelly:

I believe I recently read on the forum here that you may not be able to represent yourself in small claims court if you were to do this? If the tenant was to sue you there? Perhaps that's just with an LLC?

It's bedtime, so I'm vague on my memory of this, but you might want to check that out, too.

Otherwise, you can still deduct for a home office, which includes the percentage of your home used for it, which would be that percentage off your mortgage, insurance, maintenance, utilities, etc., etc.

 Think it's state dependant. Haven't had any problems here.

We are not taking any deductions for a home office. Nothing. Wife who trained as a cpa many years ago is adamant that it creates more problems than it solves. I seem to remember her saying something like home office expenditure is an audit red flag as well. Plus, on a personal level, our business expenses are kept away from our home. Our home is sacrosanct.

 The IRS has backed away from the home office deduction being a red flag.  They understand that in this economy - particularly with non W-2 income - home offices are VERY common.  This is not the audit flag it was a few years ago.  Generally, people who get audited will tend to blame the home office deduction when, in fact, people with irregular issues tend to have them on their Schedule C or Schedule E or, very commonly, Schedule F.  

So usually what happens is that something ELSE in the tax return throws up an audit flag and the home office deduction is included in the overall review.  It's extremely rare to have the home office deduction be the ONLY problem in an audited return.

@james

To expand on what @Linda Weygant said about the home office deduction no longer being an audit flag, the IRS now allows a "simplified" method where you simply multiply the square footage of the office by $5 and that's your deduction.

One has to think that if the IRS is offering and encouraging a simplified method of reporting, it's not going to be the cause of an audit.

Originally posted by @Steve Vaughan :

I have an s-corp that manages my properties for me, but taxes have nothing to do with it.  I would consult a tax professional.  S-corps and LLCs are pass-through for the most part and have minimal tax advantages.  

Depending on people's situation, S-Corps can have a lot of tax advantages compared to LLC's.

The primary benefit surrounds sheltering a portion of ordinary income from the self-employment taxes.  

I use an S-Corp for ordinary income, and LLC's for passive income. For anyone who has a lot of ordinary income in this business (wholesalers, fix & flippers), it is worth looking into S-Corps for the tax savings and other things you can do with employee benefits, etc, that you can't do with LLC's.

To stay on topic -- I believe property management fees for a PM company would NOT be considered passive income, and so would potentially be best kept in a corporation.

My disclaimer is that I'm not a financial advisor, and everyone's situation is different, so be sure to consultant a professional!!

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you