Property Management LLC

[Chuck Mace]

I want to run something by the community regarding property management and see if others have done something similar:

I'm in the process of figuring out how best to setup the legal structure for a long-term, buy-n-hold rental operation in New Hampshire. After consulting many professionals, and weighing many factors, my plan was to create per-property "holding" LLCs, and a single "property management and acquisitions" LLC to operate everything.

When explaining this plan to my insurance agent, he pointed out that if I formed a property management LLC, that entity would require it's own liability policy whose annual cost would be more than trivial. He also explained that in NH, the owners of rental property are able to manage their own properties without a license, and in the event a lawsuit was brought against them (or the holding LLC) due to property-management related issues, they would be covered via the property's liability policy. In other words, the owner/manager does not need an additional liability policy just for the management function, so long as there's no PM LLC entity.

This all sounds good, in that it's one less LLC and will save a non-trivial amount of money each year thanks to not needing the additional PM policy. However, I was also planning to use the Property Management LLC as the "face of the business". This is the entity that tenants would make checks out to. This is the entity that would have a website, and maybe a logo for business cards, envelopes, letter-head, etc.. When I explained this to my insurance agent, he suggested that I simply create a trade-name (or DBA), and use that as said entity. This would allow me to have the "operating entity" or "face of the business" that I desire, and still not need the expensive liability policy that's required if this entity is instead an LLC.

Does this seem like a sound way to go?

My goal is not to save a few bucks by skimping on insurance; Again, my understanding is that the additional PM LLC policy is going to cost several thousand dollars a year and bring little (or no) additional benefit.

Thanks in advance for any comments!

[Troy Zsofka]

@Chuck Mace - 

I am a buy and hold investor in NH. I'll share how we do it, for what it's worth:

Similar to your proposal, I keep the properties in LLCs and then have one LLC for property management. This additional LLC has the PM software (I use Buildium), pays the employees, collects the rent, makes the repairs, and is the company to which utilities and contractors bill. It pays the office expenses, owns the truck (well, it leases it from me because I was able to get a 1.6% interest rate personally rather than a 7% if the business bought the truck), owns the trailers, tools, etc. Currently that PM LLC also owns several rentals. However, starting in 2015 I intend to create a new LLC to take over this role that will not own any properties. It will charge a PM fee to all of the other entities, and I will then take my draws from those proceeds.

All of the properties are owned in LLC's. HOWEVER (and this is big), we do not have individual LLC's for each property. That would cost a TON, due to annual state registration fees, and ESPECIALLY tax prep fees from the accountant, because each LLC partnership would need its own 1065 filed (if it is a single-member LLC it is a direct pass-through to your 1040, but it will still likely increase the accountant's workload and therefore add to the tax prep cost). On a side note, I have been told that single-member LLC's offer no additional protection than just owning the properties in your own name. Not sure if that opinion is NH-specific or not. Anyway, I'm still undecided on that, and therefore plan to stick with LLC's until I vet that opinion more fully and come to a final conclusion (if possible - which when it comes to legal issues, absolute conclusiveness is rarely truly possible).

Okay, back to before the tangent: We used to have the philosophy of having 1 LLC per every 5 properties. However, that is getting cumbersome and expensive, so I plan to make it 10 properties per LLC moving forward. There are specific considerations that go into this decision though: My focus is on single-families (at least right now), and the liability risks are less than in multi-families. Therefore, like your agent said, a $1M liability policy on the property (plus another $1M policy umbrella) is likely going to cover any liability risk exposure you might face. If I were to move into multi-families or commercial properties, I would reassess my strategy and probably go with individual LLC's (or at least fewer properties per LLC).

Happy investing,

Troy