Once your IRA has purchased real estate, you can start making management decisions, such as choosing tenants, contractors, or individuals to maintain the property. As the IRA holder, you cannot be the property manager, nor can you perform the labor. Property management companies can be very useful to help real estate investors navigate day-to-day operations and avoid the risk of prohibited transactions. See IRS Code 4975.Property management encompasses duties such as:
- Accounting and record keeping
- Check disbursement
- Property maintenance and repairs
- Rent collection
Finding a Property Manager
While the IRS doesn’t require it, it is advisable to find a property manager that specializes in your area of investments (residential or commercial). A personal referral is a good way to ensure that you are contracting with a reputable firm. You may ask a real estate professional, title company, or other investors in your area who they use to manage their properties. Joining and attending local real estate investor groups can provide a wealth of information from seasoned investors. Trade groups such as the Institute of Real Estate Management (IREM) and National Apartment Association (NAA) can also provide referrals.
Research property managers before calling them for an interview. Check their licenses and certifications. Drive by properties they manage to see how they are maintained. Find out how they handle vacancies. Check to see if any complaints have been filed against them. You should also consider how many units they manage and what type of insurance they carry. Before hiring a property manager, determine exactly what services the firm will provide, and of course, knowing a company’s fee structure is imperative.
It is important to have a properly prepared agreement that fits the needs of your investment property. Review the contract carefully. You may even want to involve your attorney. The property management agreement will be made in the name of the IRA and is signed by Entrust for the benefit of the IRA at your direction.
For example: The Entrust Group, Inc. FBO John Smith Account #12345.
Be sure to review the liability that the property manager holds. A "hold harmless clause" typically protects the property manager, except in cases of negligence. To protect the property from negligence on the part of contractors or third parties who the property manager hires, make sure to include a reasonable care clause in the agreement.
While it is not required, some investors choose to hire a property manager for the purpose of consolidating expenses. Though the IRS prohibits the IRA holder from being the property manager, Entrust permits IRA holders to receive the rental income and forward it to The Entrust Group for record keeping. Please note, the check from tenants must be made payable to your IRA, not in your name.
If you hold a self-directed Real Estate IRA with Entrust, all income and expenses are sent to the Entrust cash management team (CMT) for processing. Rental checks must be made payable to The Entrust Group Inc. FBO [client legal name or plan name], account # [account number]. For expenses to be paid by Entrust for your IRA-owned property, complete a Payment Authorization Letter and send it, along with a copy of the invoice or bill, to the CMT.
If the property is being managed by a property manager, the property manager collects the rent and sends it to Entrust for deposit, along with the profit and loss statement. It is preferred if the profit and loss statement is sent monthly. If no property management company is managing the property, the rental income should be deposited directly to the IRA. The income goes into the IRA tax-deferred until a distribution is taken. If the property is owned by a Roth IRA, you do not pay taxes on the rental or any income associated to the Roth at the time of a qualified distribution because you will already have paid taxes on the contributions made to the Roth.
Having a property manager is advantageous if you are partnering with others. Your tenants do not have to write multiple rental checks to the various investors. They just write one to the property manager, who then distributes the percentages accordingly.
Any expenses related to the investment, including escrow or deposit funds, maintenance fees, insurance, and repairs must be paid directly from the self-directed Real Estate IRA. This means the IRA must have sufficient cash to pay these amounts.