Many investors would love to manage their own property, but simply can’t. If the constraints of time, living out of state, or a growing portfolio make direct property management impractical, or you never cared for it much in the first place, the job still needs to be done. So when you can’t manage your rental yourself, your job becomes managing the property management. On-site property management can look a few ways, and providing a manager all or part of their rent as compensation is an age-old practice. But before you make such a deal, learn about the risks and best practices below.
An inherent risk to these arrangements is finding yourself in an illegal one. For free rent in exchange for property management to be legal, the agreement typically must meet three key requirements:
Those are your federal legal conditions. Each state will also have different laws on this matter. You also need to ensure you’re not violating labor laws and handling the manager appropriately. Simply consulting with a qualified real estate attorney can get you up to speed on what this means for you.
Fortunately, many of the risks of offering a rent-for-management arrangement to a tenant can be mitigated. You will need at least three things:
The first, and most crucial, step legally is to formalize your relationship with a contract. A contract is your place to clearly outline the conditions of your agreement with the manager: job duties, mutual expectations, etc. If your agreement meets the legal requirements, you typically have the option to hire the manager as an independent contractor. Using independent contractors in lieu of formal employees where possible saves time and money because you will have more responsibilities for employees. Independent contractors pay their own taxes and tend to have more control. But you’ll need the next two tools to ensure your contractors aren’t misclassified as employees--a costly mistake.
Keeping immaculate, adequate records is important on both sides of these relationships. Establish a timing system to track hours worked. There are free apps that allow your manager to track by task. Such tools are useful for managing independent contractors and documenting their status.
But your most important tool by far is your real estate attorney. Your lawyer can ensure you have the correct contracts, structures, and knowledge for a safe, legal agreement.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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