How is your Property Management company constructed?

Rehabbing, Fix and Flip, Rental Properties
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Hello,

This forum is informative, well-organized, and very friendly.  I extend my appreciation to its administration and its members!  Thank you for offering such a fine service.

I am very new to real estate investing and have been coming up-to-speed on all that I can over the last 9 months.  As I am starting to gain the confidence and theory-level understanding of real estate and some real estate financing techniques I am taking my first "real" moves.  One of which I could use some help on ...

To those of you who have been investing in long-term holdings, what is an ideal company structure to collect rents, pay-out debt, and manage expenses?  Basically, do you have a single entity (LLC, Corp, 'DBA') that you manage your long-term properties with?  I am looking at creating a business checking account with BofA or Well Fargo (any other ideas?) to have all rents collected, debt paid, maintainance, etc...

I have heard of investors taking title to property (in a landtrust) and have the beneficial interests in a LLC. Not wanting to put all your eggs in one basket, some investors have several such shell LLCs. I am thinking of constructing is a “master” LLC that would handle the finances of all subsidary entities.

This way, I only need a single checking account for all properties. Plus, there is some asset protection.

I drew a GREAT ASCII art picture to clarify what I am talking about but after 'preview’ing my message it was very very nasty looking! sorry.

How do you do it? Are there any gotcha’s in this idea?

Thank you for your help,

-Erik-

P.S. - I have a friend that collects Rent in the subsidiary LLCs (shells) but now has 4 or 5 such entities with a separate bank account for each. He deals with Section 8s and says its too much of a paper work hastle to redirect everything to a master LLC, but would if he were to do it over again.

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Erik,

Wow…you managed to cover lots of topics in one post. So where do I begin? :question

First of all, a lot of this stuff depends on where you live. I’m assuming you’re in Texas. If you’re not in Texas, you’ll need to get state specific information from a good attorney in your state.

I’m not an attorney…although I know a bunch of them and even married one…LOL…my wife is an attorney! :thumbsup

This stuff can be debated back and forth till the end of time. :argue However, I feel there is no “one perfect way” to do this stuff. It all depends on where you live, where you do business, how much business you do, what kind of business you do, who you do business with, and what you have before you start doing business.

Also, I believe a lot of newbies spend way too much initial energy trying to figure out how to structure their entities and not enough time doing what’s really important which is getting a few deals under their belt. :banghead The entities can be set up anytime. They don’t HAVE to come first. I did my first 5 deals in my own name before I set up any entities. If you’re out there doing tons of deals then yes this stuff is important, but If you haven’t even done one deal yet, I’d say do a couple of deals and see if you’re even going to like this biz before you lay out a few thousand dollars setting up entities.

I use a combination of Limited Partnerships (LP’s) with Limited Liability Companies (LLC) as the general partner of the LP. I know other investors who use LP’s and have an S. or C. corp. for the G.P., and I know investors who hold everything in a single LLC, and I know investors who create a new LLC for each property they buy. A lot of this depends on your risk tolerance, taxes, parties involved, how many and who, and how you feel about paperwork and bookkeeping.

I like LLC’s over C. Corps and S. Corps because of their ease of use. There are LOTS of requirements that Corps must comply with and if you don’t do everything just right you leave yourself open to what’s called “piercing the corporate veil.” That’s where a judge can “bust” open your Corp. because you weren’t following all the requirements, leaving you exposed.

You use the word “shell” a lot in your post. I want to caution you about you’re thinking here. These are not “shell” or “sham” entities. These are legit business structures, which if used properly can serve you well, and if used improperly can cause more harm than good. Enron comes to mind here. :grim

There are always going to be “gotcha’s”. That’s because you set up these entities based on assumptions about the future that may or may not be accurate. :flush

It’s a broad topic that could take a book to cover completely.

Happy Investing,

Stacy

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Stacy,

I appreciate your comments.  Thank you!  I thought that I should fine-tune my initial post a bit to leave less ambiguity.

As a new investor, what is the minimum amount of financial structure that you (and other investors) would recommend implementing prior to deal number one?

I am completely comfortable waiting to build the asset management empire after several deals are done, and after I am satisfied that my future is REI is set. However, I certainly would like to “do it right” as much as possible the 1st time to avoid any overexposures. I have slight hesitation in proceeding to make deals from my personal bank account and under my own name (in opposed to at least a Sole Prop.). Setting up some type of separate banking account, I would think, should be a minimum for at least tax issues. Does this make sense? :roll:

Oh, I live and invest in Texas. And, I will be moving either to San Antonio, Austin or Dallas within 5-6 months with my 9-5 Job.

Thanks again for helping me sift through what can sometimes feel like a maddening :eyes amount of RE info!

-Erik-

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Erik,

Glad to have you posting…welcome!

To answer you’re questions I still need more information. Is this first deal going to be a long term keeper or a rehab/retail or a wholesale flip?

If you don’t want to do anything in your personal name then consider setting up an LLC. For reasons mentioned above, an LLC is much more flexable than a Corp. and costs less to set up. It’s also easier to convert out of an LLC into something else, say a Corp., at a later date. However, it’s very hard converting a Corp. to an LLC or even a C. Corp into an S. Corp.

You’ve mentioned Sole Prop. a few times, but that isn’t an entity. That would just be you working under your social security number which you say you don’t want to do. Not to mention as a Sole Prop. you have absolutely NO protection from law suits and creditors. :anon

As for not wanting to mix business account money with personal money…good luck. LOL :fingerx

Here’s an example. Let’s say you set up an LLC and fund it with $1,000. You buy two “keeper” properties and collect the rents in the LLC. Three months after you buy them you find out that one needs a new roof, $3000, and the other needs a new HVAC system for another $3000. Where’s the money going to come from? It won’t be in your LLC unless you’ve flipped or retailed a couple of other properties. More than likely it’s going to come from your personal checking account. :doh

Don’t let all the details get you bogged down. Try to stay focused on the bigger picture.

Hope this helps. :thumbsup

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Stacy,

Thanks for the welcome and your comments.

The LLC is for property management of “keepers”. Eventually, I see this as providing health-care and other benefits for me and my family (that I currently have with the “9-5”. I like Bill B.'s suggestion of separating long-term properties into LLCs and doing retailing/flips/wholesales in a separate entity (S-Corp). However, as much fun as I really do have designing and debating the ins and outs of how to best structure and protect your assets, I need some assets first! :oops:

Of course you are right about the difficulties in separating your personal/business accounts. Which brings up an interesting question:

How much cash do you leave idle per keeper?

I have had the privilege of talking with John Schaub and when asked that question he said that with 10 houses he would be happy to have an idle $1k. (He did add that he could “get to” more money if he really needed it).

Perhaps I am too conservative, but I had a goal of maintaining $1-3k/keeper in the bank (or some easily liquefied vehicle).

One obvious downside is that I am directly limited to controlling as many houses as I had available cash. On the up-side I could weather a light financial storm from any one house w/o it affecting my other investments.

Thanks again,

ECS

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ESmith,
I sent you a set of Powerpoint slides to your email address on file. These slides are from an investor team in Chicago that I have worked with. I think they did a pretty good job of depicting what you have been discussing thus far -They outline, in a basic format, the advantages/disadvantages of different types of entities, etc. Not that it is the sole answer, as I agree it depends on your situation, but it provides some insight.

BTW - one of them is an attorney.

If anyone else would like a copy of the file, let me know.

Regards,
Dave

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Dave,

That Powerpoint presentation was a great help! Thank you for taking the time to forward it to me. Have you structured your business to model any of the ideas presented? Are you investing in SFHs in the San Antonio area?

Thanks again for the great info.
Perhaps, TRandle would find it useful to post the Powerpoint presentation somewhere on this website for others to see?

Erik

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DA,
If you’ll send me the file, I’ll see about getting it up someplace with the March update. Thanks.

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TRandle, did you get the file mentioned above? Will it be in the March updates? and if so, will you let us know when it’s up?

It sounds like something I’d like to look at. Oh, and thanks for providing such a great site!!!

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Htown,
Yes, I plan to include it with the March update. Thanks.

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Choice of entity is a concern for many people because it involves some complex issues.

I’m a CPA and work in Dallas. I’ve seen many people screw up choice of entity decisions, and it cost them some serious tax money.

Alot of people set up LPs in TX because LLCs are subject to the Texas Franchise Tax and LPs and GPs are not. Of course, you don’t want a GP because there is no liability protection there.

Because an L.P. has to have a general partner, many people set up their entities in this manner

Partners own 99% of LP
LLC is 1% GP in LP
Partners own 100% of LP

This provides liability protection and only exposes 1% of the LP’s income to franchise taxes, which can be a blessing. With this structure, you can have a shell LLC own 1% of all of your LPs for your different properties and still avoid MOST ALL of the TX Franchise tax. I wouldn’t manage the properties through that LLC, however, in case of lawsuits. There is the potential that a creditor could go after the 1% interest in the shell LLC’s LPs. Hope this is not too confusing. In general, I’d have

Management LLC - owns nothing
Shell LLC - owns 1% of each of the properties you have in LPs.
LPs - own the properties themselves.

As always, talk with a lawyer. You get what you pay for.

Stay away from S corporations. C corporations are bad enough because of the double taxation, corporate minutes you have to keep, etc. S Corporations, while not double taxed, can have issues with passive income taxes and built in gain taxes. In other words, it’s not good to hold rental real estate in an S corporation.

Hope this helps.

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Tribal governments may be responsible for constructing and maintaining roads, buildings, bridges, tunnels, treatment plants, and landfills, as well as for renovating and demolishing buildings.construction and maintenance activities.