Setting Up a Property Management Company
Thinking about setting up a property management company to use for my rentals to show the income as part of the management company rather than personal finances. I am sure this is a common strategy because I have heard various discussions about this. Wanted to get more information on what type of business to set up (LLC, S-Corp, etc.) As well as get any feedback or do's/do not's from investors who had success with this strategy. Appreciate any insight.
Hello Ben,
Getting your entity structure right is important for your long-term success. You want to find a strategy that not only accommodates your current holdings, but your future goals as well. I am happy to speak to what I have seen as the most common set up from a tax perspective to give you a starting point for a deeper discussion, but ultimately you will want to speak with your CPA in conjunction with an asset protection attorney because this requires a deep dive into your specific situation.
Most commonly, we tend to see investors set up a holding company that owns the LLCs holding the rental properties. For tax purposes, the LLCs are disregarded entities, and all income and expenses are reported under the holding company. With the help of a tax accountant, you can decide if your holding company should be taxed as a partnership or as an S-corp. Both are passthrough entities, meaning the income and expenses ultimately flow to your personal return, and both have benefits and drawbacks. The choice will be unique to your goals and should be discussed with a CPA.
Just as a side note, here is a mistake I see a lot of people make: You almost never want to hold your real estate investments directly in your S-corp. This can trigger unfavorable tax rates when the property is sold, plus there are potential loss limitations, transfer issues, distribution problems, etc.
I hope this helps and if you want to have further discussion on your unique situation, I'd be happy to set that up.
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@Ben Capone - if you self-manage, setting up a property management company to act as the public-facing entity is also part of a smart asset protection strategy. This shell company shouldn't own any assets and be just enough capitalized for normal operations; it should be the entity to interact with prospects, tenants, and contractors, while your asset-holding entities do just that (hold assets and nothing more). You should have PM contracts between your PM LLC and your asset-holding entities or yourself - and you can charge a PM fee that will generate self-income. Once you have self-income, and if you don't have employees, you can set up a Solo 401K (and Solo 401K Roth), the best option of SDIRA options, and contribute tax-deferred/free $69,000 per year (and $69K for your wife, if she's a managing partner in the PM LLC), thus setting aside a big chunk for more investments (private lending, notes, syndications, even more houses). Of course, run all this strategy with your lawyer and CPA (good luck bringing them to an accord); PM me if you want more details.
@Brandon Green - if you "set up a S-corp holding company that owns the LLCs holding the rental properties", and both are passthrough entities, and sell property, wouldn't the money pass to the S-corp and trigger the unfavorable conditions?
