Running your rental business: Should you set up a separate property management company?

Maybe!  Having your properties and management duties separated into different companies can have many advantages.

The main advantage of creating a management company is that you can easily deduct office expenses (even if that’s a home office), vehicle expenses, and employee costs.   You can arrange healthcare for your employees, and set up retirement programs.  A separate company can easily advertise and build respect and recognition.    And you could even consider managing other properties!  Not only would that bring in more income, but it would also spread risk and “diversify your portfolio”.

In addition to the above tax breaks and deductions, you also would have a business producing “active” income, whereas properties on their own often produce “passive” income.  This is a rather large subject, and I will not tackle it here.  But keep this in mind as you consider if a separate business is a good idea for you.

Having a separate management company could also protect your properties from lawsuits.  Again, a rather in-depth discussion is needed here, but I wanted to mention it.

So why not form a separate company?  It is more to keep track of.  More costs setting up.  More taxes to file, and more bills for preparing those taxes.

I don’t think that any of these reasons are much of a deterrent if you are making rental properties your main business.  The pros outweigh the cons!

However, this is an area where you must research if your state/country allows you to operate both a property management company and have other companies holding your properties.  For example, in the state I live in, you need to have a real estate license to manage other people’s properties.  And creating such a division, set up properly and involving LLCs, would prevent a non- real estate holding company from managing real estate without that license.

If you are considering setting up a separate management company, thoroughly check your local, state, and country-wide laws.  Then run the numbers with a knowledgeable tax accountant.  You could find yourself saving money on taxes, and claiming tax breaks and funding health and retirement accounts!

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