As you are creating your business strategy, two central questions are:
-
who is going to run the business?
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who is going to run the facility?
The answer to the first is you!
You are going to run the business. You’re creating it and it’s an extension of you. It’s your art work in the world.
The answer to the second question, who is going to run the facility, well….that depends.
That depends on your why. Why are you creating this business?
Look, if you have a full time job, and this business is your hedge against the future unknowns, and/or this is your future retirement, and you have a facility over 35,000 square feet or so of self storage; you very well may need to hire someone to run it.
“But I don’t want employees and I don’t want to manage employees.”
In that case, you may be a perfect fit for a third party management company. They handle all of the hiring and management of employees – and charge you for it.
If you need staff, you’re going to pay for it either way. Either you are going to hire, fund the payroll, and manage them (what is your time worth?), or you can hire a third party management company to hire, manage and pay a management fee.
So how much is the management fee?
I usually see it around 6% down to 4.5% for very large facilities.
Let me say that another way.
I charge 6% and down to 4.5% for larger facilities.
Yes, I change our ownership for managing the facilities. I make our management performance driven, but I do charge.
Even of you self-run the facility, I suggest you also charge a management fee.
Just to be clear – everything from this point forward is the way I approach this issue and my thinking behind it – for your own business, you need to work with your accountant before you put any of this into practice.
If you’re the owner, the artist, the creator of the business and you run it, in essence you have created a job.
Most owners have two options:
- They give themselves a salary, take the payroll and social security taxes out, and then if there is any money left over after operating cost and debt service they take a equity distribution, or
- they just take a equity distribution.
I usually lean towards the latter in order to minimize my taxes. I have found that I generally pay less taxes because the tax benefits of owing the real estate, (i.e. depreciation, expense deduction, interest write offs, etc.) off set much of the taxable equity distributions, and I end up owing less taxes than I would by paying through payroll deductions.
Especially if I get a cost segregation report when I put the facility in service (don’t worry – in two weeks my post will cover Cost Segregation in more detail).
However, let me offer a third alternative if you are going to self-manage the facility. This even works if you’re hiring managers, supervising them, and not taking a salary for yourself.
Pay yourself a management fee.
Now that sounds silly. It is just an extra expense and reduces my profit.
Exactly!
You’re not getting a salary, so you don’t have payroll taxes. Let the facility’s tax benefits shelter much of the 1099 management fee you will receive.
For the facility, the management fee to you is an operating expense. This reduces the taxable profit at the facility level to pass through to you as an owner for your personal taxes.
Take us for an example:
We get K-1 forms from the facility (LLC tax returns). The facility’s profit is reduced by the management fee amount, so there is less taxable income passing through.
The funds I received as a management fee have no taxes taken out and the taxable income I receive on the personal side is reduced by the tax benefits of owning real estate as mentioned above (the depreciation, expense deduction, etc.).
Because I supervise and oversee the managers, even if I had another full time job, this would not be passive income for me (again check with your accountant), so there is are no limitations to what part of this income I can deduct against my taxable income.
I have actually had situations where I am receiving five and six digit incomes from a facility cash wise but have a negative K-1 number. No hanky panky, no funny accounting. Just some of the benefits of ownership and the willingness to take the risk.
As you create your business strategy, think through how you will run the business and run the facility.
They are not the same thing.
If this is an area where you do not have a lot of experience, have as part of your team someone that can give you accounting advice to support you.
You are creating something where nothing exists, so create a masterpiece.
