How to Start a Property Management Company

A property management company runs rental property for owners who do not want to do it themselves. It advertises vacancies, screens applicants, signs leases, collects rent, handles repairs and sends the owner a monthly statement with the money that is left after its fee. Starting one takes less equipment than most businesses: a license in most states, a company, the right bank accounts, a written agreement and the first few owners willing to trust you with their buildings.

The license is the part people underestimate. In most states, leasing or collecting rent for someone else in exchange for a fee is real estate brokerage, and doing it without the license the state requires is unlicensed activity. This guide walks through the license question first, then the company, the accounts and the paperwork that make a management business work.

Do you need a license to manage property for others?

Usually yes. The rule in most states is built on the same idea: renting, leasing or collecting rent for another person, for compensation, is an activity that requires a real estate license. Owners managing their own property do not need one; the license question arises the moment the property belongs to someone else and you are paid to manage it. A few examples show how the states word it:

• California has no separate property manager license. The Department of Real Estate treats leasing, soliciting tenants or collecting rent for others, for compensation, as acts that require a real estate broker license. A licensed salesperson can do the work only under a broker. Resident managers of an apartment building are exempt.
• Texas looks at the duties. The Texas Real Estate Commission says a property manager needs a license if the job includes showing or leasing the property for compensation, and controlling the acceptance or deposit of rent from a single-family tenant for someone else also requires one. An owner's own employee and an on-site apartment manager are exempt.
• Florida defines a broker in section 475.01 of its statutes to include a person who, for another and for compensation, rents or advertises property for rent. Salaried leasing staff working in an apartment community's on-site office are among the exemptions.
• Oregon issues a separate property manager license for people who manage rental real estate, and requires a signed property management agreement with the owner before the manager takes over a property.

The path to the license varies. Some states license a property manager on its own; most require the broker license, or a salesperson license held under a broker who supervises the management work. A new manager without a broker license often starts as a licensed agent inside an existing brokerage and opens a separate company later. Check your state's real estate commission before you sign an owner or advertise management services, because the advertising alone can count as holding yourself out as a broker.

How to start a property management company, step by step

1. Decide what you will manage and how you will be paid. Single-family homes, small apartment buildings, condos for out-of-town owners and commercial space are different businesses with different tenants, vendors and hours. Decide which you will take on, whether you will offer full management or leasing only, and how you will charge. Most management agreements combine a monthly fee, often a share of the rent collected, with separate fees for placing a new tenant or renewing a lease. Whatever you choose goes into the agreement in writing.
2. Get the license your state requires. Use the section above as the starting point and read your own state's license law. In states that license the business as well as the person, the company itself may need to register with the commission and name a licensed broker who supervises it, so plan the company and the license together.
3. Form the company as an LLC. A management company handles other people's money and homes, so it should not be run in your own name. An LLC puts the leases you sign as agent, the vendor contracts and the claims that come with them on the company, not on you. Form it in the state where the properties are, name a registered agent and sign an operating agreement. If two partners start the business together, the agreement should say who holds the license, who signs for the company and what happens to the clients if one partner leaves. The general filing steps are in how to start an LLC, and what a two-owner agreement covers is in multi-member LLC.
4. Get the company's EIN. The company needs its own federal tax number before the bank will open its accounts. The next section explains why a management company in particular cannot get by without one.
5. Open an operating account and a trust account. A management company holds two kinds of money that must never mix: its own fees and the owners' and tenants' money. The trust account section below covers how states require that to be set up.
6. Write the management agreement and get insured. The management agreement is the contract the whole business runs on. It should state the services, the fees, how much the manager may spend on a repair without asking, how and when the owner is paid, who holds the security deposits, and how either side ends the agreement. Insurance usually means general liability for the company and professional liability (errors and omissions) for mistakes in management, and the owners should keep their own landlord policies with the company added where the insurer allows.
7. Set up systems, vendors and fair housing practices. Property management software handles the rent ledger, owner statements, maintenance requests and the trust account records. Line up plumbers, electricians, cleaners and handymen before the first emergency call, and collect a W-9 and proof of insurance from each one. Write your tenant screening criteria down and apply them identically to every applicant.
8. Sign your first owners. Each new owner signs the management agreement and gives you a W-9. Take over existing leases, keys and security deposits with a written handoff that lists the amount of every deposit, then send the tenants a notice telling them where to pay rent from now on.

The EIN step for a management company

Some small businesses can run for a while on the owner's Social Security number. A property management company cannot, for three reasons. First, the trust account and the operating account are opened in the company's name, and banks ask for the company's EIN to open them. Second, the company is a filer of information returns: the IRS instructions for Forms 1099-MISC and 1099-NEC say a property manager uses Form 1099-MISC to report the rent it pays over to each owner, and vendors the company pays for repairs are reported on Form 1099-NEC. Each of those forms carries the company's own tax number as the payer. Third, leasing agents, maintenance staff and office help on payroll require an EIN under any business structure.

The forms run the other way as well. Before you can send an owner a 1099, you need the owner's W-9, and many owners hold their rentals in an LLC of their own, which changes whose name and number go on the form. How a single-member or multi-member LLC fills in the W-9 is explained on llc-ein.com; it is worth sending to owners along with your blank W-9 request.

Trust accounts: the owners' money is not yours

Rent collected for an owner, security deposits held for tenants and reserves an owner leaves with you for repairs belong to someone else. State license laws require a licensed manager to keep that money in a trust or escrow account, separate from the company's operating account. California's rule is a typical one: the Department of Real Estate's trust fund guide says a broker who accepts funds belonging to others must place them with the owner, in a neutral escrow or in a trust account kept in the broker's name as trustee, and it lists depositing those funds in the general business account as commingling, one of the violations its audits find most often.

In practice that means one operating account for the company's fees and expenses, and at least one trust account for owner funds, with a separate ledger for every owner and every property. Many managers keep tenant security deposits in their own trust account as well, and some states set rules on where deposits are held, whether they earn interest and when they must be returned. Fees move from the trust account to the operating account only when they are earned and shown on the owner's statement. Reconcile the trust account against the owner ledgers every month; a regulator auditing a management company starts there.

Fair housing applies to the manager, not just the owner

A management company advertises units, screens applicants and decides who gets the lease, which makes it directly responsible for following fair housing law. The federal Fair Housing Act prohibits discrimination in renting because of race, color, religion, sex, national origin, familial status or disability, and many states and cities add more protected categories, such as source of income. Following an owner's instruction to turn away a protected group does not protect the manager. Written screening criteria applied the same way to everyone, ads that describe the property rather than the tenant you want, and a process for reasonable accommodation requests from tenants with disabilities are the basic safeguards.

What the first year looks like

Most new management companies grow one owner at a time, often starting with investors the founder already knows, out-of-town owners and accidental landlords who inherited a house or moved for work. A few habits make the difference between a business that keeps its owners and one that loses them:

• Statements on a fixed date. Owners judge a manager on the monthly statement: rent in, expenses out, fee, payout, every month on the same day.
• Spending limits in writing. The agreement says how much you may spend on a repair without asking. Emergency repairs get done and reported; everything else waits for the owner's answer.
• Inspections with photos. Move-in and move-out inspections with dated photos decide security deposit disputes.
• Year-end forms on time. Owner 1099s and vendor 1099s go out each January, so W-9s collected at signup save a scramble later. How the company's own return is filed depends on how the LLC is taxed, covered in how to file LLC taxes.
• The company kept in good standing. The LLC's annual or periodic report, its registered agent and the license renewal all run on their own calendars. A lapsed license or a dissolved company can stop the business in the middle of a lease cycle.

What the LLC costs the state to form and keep

The license fees and the cost of the broker course depend on your state's real estate commission. The company itself has its own state fees: a formation fee once, then a recurring report or tax. Here is what the ten most populous states charge an LLC.