Self Property Management - Should I do it under LLC?

Question

Hey BP community,Hi my name is Fred, I am in the process of finishing up my first investment deal. I bought this under my name. I want to self manage this property. I was thinking I should do this management as an LLC to separate ownership and management even though I will be doing both. Maybe more to keep my personal removed from the daily operations of the property and have the renter contacting a company (LLC) for operations and not me on a personal level. This way, it presents a business like atmosphere for the renter and not like they are dealing with an individual. Plus it will force me to put in professional systems, procedures, policies, etc. in order to make it work efficiently. If anyone has done this and would like to share there pros and cons, I would love to hear it. Thanks

Jessica Zolotorofe · Answer

I think this is a good idea, but don't let it be a substitute for a good insurance policy. Make sure if you do that you keep your expenses COMPLETELY separate. It seems silly, but since it's just you and it won't be too much of a hassle, I would suggest you collect rent through the ownership entity, so have tenants make the rent payable to you personally, or you c/o the LLC, but not directly to the LLC. Then deposit that check into an operating account in your name, not the name of the LLC. Do your best not to commingle funds. Have a totally separate account with you and the LLC as signatories, but don't just deposit into your general bank account. Have all contracts with service people in the name of the LLC and have the LLC pay them directly, not with personal checks. You want to do whatever you can in case you have to make the argument later that the entity is really separate from you. I would DEFINITELY have a formal contract between you and the LLC making the entity your leasing agent and property manager. It's more work, but for liability purposes, it could be worth it for you.

John Mocker · Answer

I am working on a similar situation here in CT. USLI Insurance company is going the Professional. They also do General so they might be a good fit. There are many other companies doing Professional for Real Estate and Property Management. My Guess on costs would be in the $1000 - $1500 Range. Normally, a commercial umbrella policy covers over General Liability but not the professional. The limits on the Professional can be increased in $1mm increments. Because there are claims that may involve both policies or where there is an overlap of coverage, I recommend putting both coverage with the same company. There is no exact formula for what is the right amount of coverage. I normally would not recommend less than $1,000,000 limits. If it becomes an issue of affordability many companies would offer limits of $500,000 or $250,000. Feel free to contact me if you need any more info on contacts for USLI or info on the different policies. Good luck.

Fred Mejias · Answer

@John Mocker thanks for your input. For General and Professional Liability coverage, do I just contact my insurance company? Are there certain companies that specialize in this area or are most insurance companies able to provide this service? And how much is enough coverage? Also could umbrella insurance be put in place of any of these insurance coverages? Finally, is there anyone else who has done this and have any plus or minuses to add? much appreciated!!

John Mocker · Answer

Fred,A property management company should have Professional Liability, General Liability, Cyber Liability, Employment Practices Liability, Workers Compensation, and possibly other coverage depending on other factors (ie. are there business owned vehicles). Since you would initially be managing just your property some of these policies/coverage may not be applicable. If you do not employ any agents, managers, etc. you may not need the Employment practices. If you do not have a website or business email you may not need the Cyber. You may be able to add the LLC to the policy on the property as an Additional Insured to get some of the General Liability. Lastly, since the LLC could be named in a suit from a Tenant, you may want to have some Professional Liability coverage.

Jessica Zolotorofe · Answer

Welcome! Best of luck :)

Fred Mejias · Answer

@Jessica Zolotorofe So no personal checks!! That sounds reasonable. I know our intention is to create a bank account for the property. So all property transactions will go through that account. I would assume it would be similar for the LLC; have its own separate account in order to keep track of all transactions from the LLC. In addition to maintaining that separation. Thanks for your insight!!

Jessica Zolotorofe · Answer

No problem! You can use your own money to run the property, that's ok. If it was an SDIRA we would be in a different situation, but just a simple property management separation, that's ok. But I would put money into the operating account and then let the LLC use that money as opposed to you writing any personal checks to the landscaper or the plumber. So you can put money into the operating account and the LLC can then write the check to the service provider. Hopefully, the property expenses will eventually be outweighed by the rental income, but it's ok to use your own money at first to fund the operating account. Again, I would just try to avoid any scenario where a personal check made its way to a contractor that should've been paid by the LLC for something they are responsible for in the management agreement. Does that make some sense?

Fred Mejias · Answer

Those are some good points I was not sure about. I totally understand the separation of funds (personal and llc) and like a lot of the setups and duties you mentioned fro the LLC.@Jessica Zolotorofe how about funding the LLC? I understand that an agreement between myself and the LLC would be establish and a monthly fee similar to any other PM company could be paid to the LLC. But the initial set up and working capital for the LLC; would come from my personal account; how is this captured? In the LLC operating agreement or some other document? In addition, the set up having the LLC contract and pay for services required on the property sounds great, but how could I fund the LLC so it can handle this sort of scenario in instances where the LLC is low on cash. Sorry for the questions, I just want to make sure that if I do something like this I can maintain a clear separation between property owner and business owner.