LLC for Property Management?

Question

I know the issue of LLC's has been beaten to death around here, but I am having trouble finding the answers to some of my concerns. I am about to purchase my first rental property in my own name which I plan to manage myself. I know the prevailing wisdom is that you should hold the property in an LLC, but then you have to get commercial financing, and I hear that transferring into an LLC later is a risky process. So for now, I plan to hold the property in my name.

My question is, should I still set up an LLC to manage the property? I like the idea of having a separate entity with its own bank account set up to handle all real estate related tasks, but am unsure of the ramifications of doing this. If I own the property in my name, but manage it through an LLC, how are taxes and deductions handled? Is all cash flow from the property then considered as the LLC's profit and loss?

Marcin G. · Answer

talked to 2 lawyers about that actually. Due to a huge overproduction of lawyers nowadays  ..they became very talkative during the first “free” consultation ;-))
You need to follow LLC “rules” separate bank account, LLC name, lease agreement under LLC name, thorough operating agreement (not some internet template) …etc.  so that your LLC was NOT an LLC that lives in your desk drawer only...
Does it add a layer of protection – yes, especially if you own say 4,5 rentals and want to create say 1 LLC per 2 rentals.
Will you be liable with your other assets if something happens in your rental– maybe –that depends if the plaintiff’s lawyer will manage to prove to the judge that your LLC is just on paper. Many circumstances will be taken into consideration
Are your assets that you put in LLC  protected when you are sued personally (car accidents with multiple victims and you at fault) – it offers far better protection than sole proprietor (no protection). That’s for sure
So for $X  a year I would add that additional layer of protection (on top of $500K in liability insurance of course)

John Mireles · Answer

Not a lawyer. But I don't think that owning the property under your name and then setting up the management under an LLC is going to help you at all. If someone decides to sue, they're going to sue you and the LLC. All you're doing is giving someone an extra entity to drag into a lawsuit. Not much point in that.

Now, if you were managing property for others, I'd absolutely suggest an LLC for that business - and keep your personal properties out of it.

Account Closed · Answer

The consensus of this thread is correct.  Setting up an LLC for you to act as property manager is not going to provide much, if any, liability protection.  The tenant or other injured party would just name you as the defendant in any lawsuit.

Add plenty of liablity coverage to your property insurance.  My insurance company limits me to $500,000 per house.  If you have substantial assets, you should look at an umbrella policy on top of that.

Chris Simmons · Answer

I am investigating this very matter right now  Perhaps I am missing something or just oversimplifying things, but it seems like the discussion went from not including the properties and just having a management co to talk about an llc for every couple properties.

Right now, I am a sole prop with 2 active rentals and a 3rd about to come online next month.  While I am looking to grow, it won't happen over night...more like a property per year etc.  With input from counsel, I determined an LLC for the properties is not worthwhile or necessary....considering the hassles and expense that come with commercial insurance and financing etc.

I just recently started thinking about an LLC for a property management co.  Tenants have contract with property manager who has contract with property owners....right now I am only owner but working to manage other rentals later on.  Is there not some layer there...Tenant, (party A) gets wronged somehow by prop manager (party b)...thus insulating party C.  Yes, I understand party C will most likely be sued as well, but easier dismissal?  assuming tenant prevails and wrongs are by paroperty manager?  Tenant complains about needed maintenance that is not done properly by vendor (NOT BY ME, the owner operator) thus the complaint is against the prop management company and potentially the vendor that did the work.  Prop owner gets sued too but again, easier dismissal?   contract dispute between vendor and prop manager?  any insulation for prop owner?  or is mechanic lien still in effect?

llc now or just operate as sole prop for now, working to build brand and once I have brokers/realtors license and represent other parties simply update name to include llc?

Terry Portier · Answer

Good to see someone actually got some info from practicing attorney’s on this complex subject, thanks! What they told you makes perfect sense. IMHO the more legally complex and difficult a landlord can make it, the more costly it will be for tenants to get charging orders, foreclosure on a members LLC interest the better. A series of multi-owner LLCs supports that better than single owner, for example. That may come back to bite if the plantiff’s attorney is successful and the defendant landlord incurred high attorney fees. But yes each situation will produce evidence that a jury or judge will look and there is no short answer.

Adding subs vs doing work yourself supports that, and having subs doing work for an LLC vs SP supports that. The more people involved the better. In the case of subs, each state has labor laws that define if they are seen as an LLC employee or not. If you have a good contract in place written by your contract attorney to shift liability to a management company, that supports legal complexity. I don’t see any MC signing such a contract and some insurance underwriters may not insure such contracts.

Here are some sub guidelines from my state: https://www.kdor.org/misclass/mcfaq.htm#3

Steven Hamilton II · Answer

Andrew H.,

You cannot take a deduction for your time.  Unfortuantely sweat equity is not a deduction. It is just money saved.  You will have to depreciate the property over 27.5 years. Once is it ready for rent it is considered placed in service. You should keep track of your mileage to and from the property.

In order to be a real estate professional, you must not have a full time job.

I'll send you a PM.

-Steven

Andrew Herrig · Answer

Thanks all for the advice. Sounds like at this point it would be meaningless to set up an LLC. I still plan to when I acquire enough properties that I can't get personal loans on them anymore, but that will take some time. At that point I would definitely like to bring an accountant in, but I'm hoping with one property I can manage myself for now.

Steven Hamilton II, I am still researching how owning a rental property affects my taxes. For example, it is a duplex and one side needs some work so I know there are some things I can deduct as repairs and others I will have to depreciate over time, correct? Also what kinds of deductions can I take for time spent managing the property or driving to and from the property? As Jennifer Lee mentioned, I know there are differences between a "real estate professional" and otherwise for tax purposes.

George Paiva, I am definitely planning to set up a separate account, though I don't believe escrowing security deposits is required in Texas. I'd like to find a local bank to establish a relationship with that will eventually be able to grant me commercial or portfolio loans.

George Paiva · Answer

I wouldn't do it in your case.  Also look into your eviction laws.  Some states require you to use a lawyer for eviction if LLC'd.  Depends on how your property works out for you.  If you begin to add more property please go the LLC route.

Your better off having it in your name, BUT setup separate Checking   Account to handle all cash flow, remember separate escrow accounts for your security deposits.

Steven Hamilton II · Answer

Andrew H.,

What are some of your specific tax questions?

If you have one property it probably, but not definitely is hard to justify the cost.

The LLC would only be taxed on it's management income. The cash flow is passed to each property on your return on Schedule E.

-Steven

Jeff S. · Answer

Andrew H., was just at a class held by a local real estate attorney and he was asked that same question. He said that arrangement with a single member LLC would not really help.

Funny thing is he owns 12 units and they are financed and not in LLC's.

LLC for Property Management?

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