2. Licensing, Insurance, and Taxes
As a property manager in your state or municipality, licenses may involve obtaining a real estate broker’s license from the state licensing board or registering with the local government to conduct business activities related to managing properties, depending on where you live.
Acquiring licenses and permits to operate as a property manager in your state or municipality
Depending on the state, there may be different licensing requirements, so you must research what type of license you need and how to obtain it.
For example, some states require anyone managing rental properties to have a real estate broker’s license. In other states, such as California, only corporations’ employees must have a real estate broker’s license; individual contractors do not need one.
It’s also possible that certain localities within your state may have additional licensing requirements beyond what the state mandates.
In addition to obtaining any necessary licenses or permits from your state or locality, you may also need permission from any relevant homeowner associations if you manage properties in planned communities with governing boards.
Furthermore, suppose you plan on hiring employees for your business venture. In that case, you will likely also need specific employer identification numbers (EIN) from the IRS and worker compensation insurance coverage depending on where you live.
Understanding the licensing requirements for starting a property management company can take some time. However, thorough research ahead of time will save headaches in filing taxes or renewing permits/licenses, etc.
Obtaining insurance coverage for your business activities related to managing properties
Property management involves significant risk, and proper insurance will protect you from costly legal fees and other expenses if something goes wrong.
The type of insurance you need depends on the size of your property portfolio, but there are some basic coverages that all property managers should have:
Professional Liability Insurance: Also known as errors and omissions (E and O) or malpractice insurance, this protects against financial losses due to mistakes made by you or one of your employees while providing services to clients.
This coverage is essential since it covers claims arising from negligence, misrepresentation, breach of contract, and other professional duties associated with being a property manager.
General Liability Insurance protects against bodily injury or damage caused by you or one of your employees while performing work-related tasks such as repairs/maintenance at rental properties.
It also covers any libel or slander suits filed against the business that could arise from written communications between tenants and landlords about their rental agreement terms.
Workers’ Compensation Insurance: If you have employees working for the company, workers’ compensation is required in most states to cover medical costs associated with workplace injuries sustained during job-related activities.
It’s also recommended that you investigate additional coverage such as cyber liability insurance (to protect against data breaches), automobile liability (if using vehicles for work purposes), umbrella policies (for more significant protection limits than general liability offers), etc.
Ensure you research what different insurers offer so that you can find a policy explicitly tailored towards protecting your interests as a property manager.
Additionally, when shopping around for these various policies, make sure that each one has adequate limits and deductibles to cover all potential scenarios concerning the services provided by your company (i.e., tenant screening process).
Also, compare different providers to find the most cost-effective option available. Some insurers offer discounts based on specific criteria like having multiple policies with them or being part of an industry association group like NARPM®.
Understanding the tax implications for running a property management business
Taxes are an essential part of running a successful property management business. Understanding the tax implications for your business is necessary to ensure you comply with all relevant laws and regulations.
First, you should understand that income received from properties as a property manager is considered taxable income and must be reported on your taxes.
Depending on your chosen entity structure, such as sole proprietorship or LLC, different tax guidelines may apply. It’s best to consult with an accountant or other financial expert who can advise based on your situation.
In addition to paying taxes on any rental income generated from managed properties, there could be additional taxes levied in some states for services performed by property managers, such as fees associated with tenant screenings, late payments, etc.
As such, you must familiarize yourself with local taxation requirements related to being a property manager so that you can adjust the pricing accordingly when providing quotes/estimates for potential clients.
Finally, remember to file estimated quarterly taxes throughout the year, which helps avoid penalties come tax time if you withhold too little earlier or pay less in estimated quarterly payments throughout the year.