I have questions about self managing?

Question

Great afternoon BP fam🫡.1, When self managing, do you pay yourself a fee? 2, if you do pay yourself a fee, is it considered an expense (tax purposes)? 3, if you do pay yourself, do you have to set up an entity to legitimately receive that payment? I appreciate all feedback!

Michael L. · Answer

@Cory j Thornton, thanks for all the insight. Believe it or not, everything you said gave me a better overstanding on how to approach my goals. As you stated, I'm goin keep digging in and expanding, even when I get to where I think I want to be! I appreciate you bossman🤜🏻🤛🏽!

Michael L. · Answer

@Drew Sygit, thanks for the guidance. I like learning how different strategies work and fail, for future reference if necessary.

Drew Sygit · Answer

@Michael L. you should account for property management fees when you project numbers for a purchase.

Really doesn't make sense to literally pay yourself for PMC work, as it will all flow back to you anyways.

If you have partners, then yes, you should be compensated for your PM duties.

Cory J Thornton · Answer

@Michael L. - There may be different rules in your state, and I would talk to a CPA (which I am not), but I do have a few thoughts you could look into.

A) When I self managed my rentals I did not draw a fee tied to the management activity. I would just take cashflow from the rents which covered my time in management.

B) If you opt to take a management fee (active income) it may cause you to pay more in taxes than simply taking profits/cashflow from the rents received (passive income). If you are pulling fees and taking profits, depending on what you try to expense, you could spoil the entire income stream and cause it all to be taxed as active income.

C) If you are trying to create a path to more write offs then I would not use your real estate company, I would set up a different entity all together. In this scenario you would then have one of your companies as an active income vehicle, charging your passive income vehicle (the real estate company) for the management service. This would probably only make sense if you had enough units to justify creating a management company. You would also need to look into any legal requirements to own/operate a property management company in your state. In NC you do not have to have any licenses or certifications to manage property if you onw it, but you do if you are managing property for other people and receiving compensation.

I hope that gives you a few avenues to explore and hopefully arrive at a solution that works for you. Essentially, from what I understand to be your situation, it sounds like the best approach would be to manage your property, but not charge yourself a management fee. Just take the owner distributions and keep it all passive income.

All the above said, if there is a partner involved, then each partner needs to be fairly compensated for the work they do above and beyond their equity distribution. If you do not want to manage property long term, there is also nothing wrong with putting a fee into your underwriting to ensure you have the room to hire a manager in the event you decide self managing is not for you.

Best of luck on your learning and investing journey! Keep us all posted and continue to ask questions along the way. Again, a CPA in your state should be able to help you unravel what applies best in your situation.