Company to manage own properties?

Question

Hi. Has anyone established a company (llc or other) to manage your own properties? Does it help from a tax perspective? Pros/cons etc.?

Thanks.

Stuart Udis · Answer

If you are a large enough operation where you have employees then it makes sense. Otherwise you're merely adding unnecessary operational expenses. Along with the entity formation expenses if you create the separate management LLC, you will want to have general liability and perhaps even E&O or professional liability coverage.  Most who propose this arrangement do so believing they are adding a layer of protection or separation between the property or themselves and the operation but that's total nonsense as well.

Nathan Gesner · Answer

It will cost you money and add complications.

An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.

Warning: I am not an attorney, and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.

ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State's website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appear on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.

LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.

Additional thoughts:

1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.

2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.

3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.

4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your primary insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.

5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 14 years of experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is expected to be higher, you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require extra, on-going effort to maintain.

Max Emory · Answer

Hey @Binita Mehta, I won't speak to the tax side (not a tax pro) but from a bookkeeping perspective, this will complicate your operations (and, bookkeeping as a result) quite a bit.

So, ensure you have super powerful incentives from an REI-savvy attorney and an REI-savvy tax advisor prior to making this move.

Some of our Clients have implemented this in the past (prior to working with us) and their businesses weren't large enough to justify the complications that come with this type of structure.

Hope that help!

Gregory Schwartz · Answer

I set up an LLC to manage my properties, but it doesn’t actually own any of them. Here’s why:

1. From the start, we knew our portfolio would grow beyond the first fourplex, so we wanted a management structure in place. Having a "legitimate" management company not only helps me operate efficiently but also looks good when presenting to lenders and potential partners. The LLC now manages 19 LTR and 7 STR.

2. Although I'm not 100% sure it provides additional legal separation, having the LLC manage my properties gives me some peace of mind when it comes to keeping personal and business assets separate. It might be more of a psychological benefit than a legal one, but I’ll take the extra comfort!

Side note: I have no interest in managing other people's properties so that didnt not factor into my decision-making

What do you all think?

Ashish Acharya · Answer

@Binita Mehta Creating an LLC to manage your own properties offers liability protection, potential tax benefits (by paying management fees from your property LLC), and professional organization. However, it adds complexity, costs, and doesn’t guarantee tax savings without proper structuring. It's most beneficial if you have multiple properties or plan to scale.

This would be more for operational efficiency at your level. Eventually might help with tax if planned correctly. This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Bill Hampton · Answer

@Binita Mehta

An LLC will not save you any taxes. You get the same deductions with or without an LLC. An LLC is useful for opening a business bank account. A business bank account helps with asset protection, accounting and tax return preparation.

Company to manage own properties?

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