What are the basic duties of a property management company?
A property management company essentially steps into the shoes of the landlord, taking over the day-to-day tasks necessary to keep rental properties functioning and profitable. Property management companies typically perform the following tasks:
- Marketing available rental properties via listings across the platforms that are most likely to be viewed by desirable tenants.
- Showing the property to interested potential tenants.
- Conducting in-depth screening of potential tenants, including collecting relevant information on rental applications, conducting background and credit checks, and calling references.
- Coordinating tenants moving in and out.
- Inspecting and documenting properties immediately before tenants move in and right after they move out.
- Providing accounting services, especially collecting rent and managing security deposits.
- Conducting routine inspections and arranging for repairs and preventative maintenance.
- Serving as the first line of communication with tenants, promptly responding to their concerns.
What are the benefits of forming a property management company?
A property management company provides several benefits. Perhaps most importantly, it offers some protection against personal liability for landlords. If something goes wrong on one of your properties, the company may be responsible for most or all of the damages, thus protecting your personal assets. It also provides a structure for hiring employees to help you perform the tasks listed above. Depending on the type of business entity you form, a property management company may also reduce your tax burden.
That said, if you own one or two rental properties and have the time and energy to manage them yourself, it may not be worthwhile for you to form a property management company. If you want help but don’t have the time and energy necessary to form a property management company, it might be better to hire a property manager to manage your properties for you. If you decide to go that route, be sure to use a Property Manager Agreement to agree upon terms for this important role.
What type of business entity works best for a property management company?
The type of business entity that is best for your property management company depends on how you expect your business to function. A Business Entity Planning Worksheet can help you identify which type fits best with your goals.
If you plan to remain actively involved in the management of your properties and require a relatively small number of employees, a Limited Liability Company (LLC) is likely the best option. An LLC provides liability protection while allowing business owners maximum control over the management and structure of their business.
If you plan to use the property management company to transform your rental property into more purely passive income, an S-corp might be the ideal choice. An S-corp allows for a separate management structure while protecting passive investors from liability.
C-corps are the most complicated form of business entity. They provide the most control over the issuing of stocks and other forms of equity but come with complicated accounting requirements, detailed restrictions on management, and double taxation. As such, they are typically reserved for the largest and most complex property management companies with several properties.
Sole proprietorships, which are the default business form in most states, do not shield their owners from liability. Nonprofits are limited to very specific, public interest purposes, which generally do not include for-profit property management operations. As such, neither is well-suited to a property management company.
How can I anticipate the number of employees my property management company may require?
The number of employees required to run a successful property management company depends on how many properties you own (or plan to own in the near future) and how involved you want to be in running them. In general, more properties paired with a desire for less personal involvement is going to require more employees to keep your properties profitable. A solid Business Plan can help you identify your goals for your company and be deliberate about sticking to them.
Keep in mind that hiring employees is a serious commitment that comes with significant legal and financial responsibilities. Always consider whether a task actually requires hiring a new employee or can be handled by an independent contractor. For example, occasional maintenance needs and even routine repairs can be delegated to maintenance professionals or handymen. When hiring contractors to do work for you, it’s best practice to draw up an Independent Contractor Agreement. If the work is related to maintenance or repairs, consider using a Maintenance Contract or a Handyman Contract.
Can the property management company I form take care of properties owned by other landlords?
While your property management company is free to manage the properties it owns, almost every state requires some form of additional education and licensing to manage property owned by others. Most states require a real estate broker license to do so, though some states require special property management licenses.
If you have more questions about starting a property management company for your rental properties, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.