Benefits of using PM and Tax Deductions

[Michael Spindler]

Hi,

I am leaning towards using a PM (property management co.) from day one.

Are the tax benefits (deductions) worth enough to the bottom line to offset the costs of service? Do you only realize a benefit when you get to a certain size or achieve full time status?

I want to focus on growing my portfolio rather than the tenants, that alone is worth the price, regardless. But any edge against the Fed gives me grins.

Thank you.

[Jon Holdman]

The cost of a PM is an expense for the property, and as such, can be deducted from the rents you collect. Not sure I'd call that a "tax benefit", though. The PM is just another expense like insurance, taxes, or maintenance.

Is it worth the cost? It depends. Around here if you have just a few properties you'll pay 10% of collected rents plus half a month to fill a vacancy. At one vacancy per year, that's 14% of your gross rents. If you've read about the 50% rule (50% of gross scheduled market rents go to expenses, capital and vacancy), that 14% is a significant chunk of that 50% total. For the most part, tenants take very little work. Many months the total interaction is texting a reminder to deposit the rent and checking the bank to see it's there. Doing a turnover is where the work is, or dealing with problems that come up along the way. Over, IMHO, the effective hourly rate you can earn by self managing makes it worthwhile. I estimate about 20 hours per door per year. Now, I only have two at the moment, but they would cost me about $3500 per year for a PM. For about 40 hours work (less, really, since some of that 20 hours would still be mine, tax prep, mostly) I can earn that $3500.