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:
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.
Any income (rent) coming from the property cannot be deposited into any non-IRA account. This would be counted as a distribution. It is a prohibited transaction to pay yourself profits generated from the IRA’s rental property. An investor may hire a third party who is not a disqualified person to be the property manager and handle the cash flow or daily operations. For more detailed information and frequently asked questions, see Income and Expenses.