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Separate Bank Account for Rental Activities?

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S Yu

Multi-family Investor from

Jul 12 '10, 11:12 PM


Hi all

I'm closing on my first property today a 3-family unit. I was wondering if I should set up another personal bank account for all activities. I'm going to be depositing my checks and if there are repairs I'm going to take it out of this account.

I will also be paying the mortgage from this account and if I am short, I'm going to transfer money from another account.

Is this a good idea and what does everyone do? I'm just starting out. Thanks



J Scott Moderator Donor

Real Estate Investor from Ellicott City, Maryland

Jul 12 '10, 11:21 PM
2 votes


Are you planning to create a business entity out of which you with either hold and/or manage this property?

If so, set up a separate business account. If you ever get sued and want to use the business as a legal shield, having a separate business account that doesn't co-mingle with your personal funds will be important when it comes to the determination of whether what you have is a business or a personal hobby (though there are certainly lots of other aspects of this you need to investigate as well).

If you don't plan to create a business entity, then the only purpose I can think of for a separate account would be to help you manage and track your income and expenses. If you don't need a separate account for that purpose, it just boils down to personal preference.



Medium_lishproplogoJ Scott, Lish Properties, LLC
E-Mail: [email protected]
Website: http://www.123flip.com
CHECK OUT MY BIGGERPOCKETS BOOKS: http://www.biggerpockets.com/flippingbook


Steve Smithy

Jul 12 '10, 11:26 PM


Create a business, and have a separate bank account for that business. Create a business! Create a business! Create a business!

Did I say that enough? I chose a LLC myself for my rental properties. Getting sued isn't worth it. You should also get liability insurance.



Steve Babiak

Real Estate Investor from Audubon, Pennsylvania

Jul 13 '10, 01:49 AM
2 votes


If you are buying in your own name, then obviously you won't have this as a formally separate entity.

But the bookkeeping will be so much easier at tax time if you set up bank accounts for the rental property separate from accounts you use for your personal expenses. So I strongly recommend that your rental have its own bank account.

As for worries about the mortgage bouncing - the only way to prevent that is to fund the rental property's account up-front with some reserve capital. If you aren't doing this with an LLC or other company, then the money is "still all yours" - you can freely do as you please with those funds (once the rents accrue enough for you to have a comfort level).

I would suggest you contact a good accountant (CPA) knowledgeable in real estate matters to assist you with starting up your accounting system for this rental. I also suggest getting some software for the management of this (ask your selected CPA for what to use - mine suggested QuickBooks for my needs).



Steve Babiak, Redeeming Properties, LLC
Telephone: 6109082183
...


Steve Babiak

Real Estate Investor from Audubon, Pennsylvania

Jul 13 '10, 01:52 AM
1 vote


Another thing to consider is the handling of the security deposits that were funded by the tenants. Your state and local law may have some mandates that you must follow regarding treatment of those funds. If there are no such rules in your area, I still recommend a separate escrow account for each tenant's security deposit; there are some banks that have "master" escrow accounts that allow for each tenant to be a "sub-account" under the master - this is also a good way (maybe even better if you scale up in size).



Steve Babiak, Redeeming Properties, LLC
Telephone: 6109082183
...


S Yu

Multi-family Investor from

Jul 13 '10, 02:59 AM


Thanks for all of the replies.

The current tenant has security deposits and the seller gave me all the forms necessary to just do a transfer of the account. I will be doing that later today. I am going to just open a separate account and just do deposits of rents and write checks from there. Damn all these bank accounts...



Bill G.

Real Estate Investor from Springfield, Missouri

Jul 13 '10, 03:03 AM
1 vote


Hi as Steve and Jason pointed out it is very important to keep funds seperate.

You will need an escrow account, if it's required by law, your account will need to be titled XYZ ESCROW ACCOUNT, if not so required, it can be any account but ONLY deposits and funds held in trust should ever be depoisited to this account and any withdrawl should be well noted on the check and on your books.

If you comingle you accounts and you need paper towels to clean units, the IRS can simply disallow your deduction saying it was used at home since it was paid from a personal account or one of comingled funds.

I too would suggest you formalize a business entity, an LLC probably. You need to have a chat with an accountant and probably an attorney. Good luck, Bill



Steve Babiak

Real Estate Investor from Audubon, Pennsylvania

Jul 13 '10, 03:30 AM
1 vote


Originally posted by S Yu:
... Damn all these bank accounts...


You're saying that today because you don't look forward to the management of those accounts, but later on you will be thankful that you did create the separate accounts and did not commingle any funds (personal vs rental income vs security deposits in escrow).



Steve Babiak, Redeeming Properties, LLC
Telephone: 6109082183
...


J Scott Moderator Donor

Real Estate Investor from Ellicott City, Maryland

Jul 13 '10, 05:29 AM
1 vote


Originally posted by Steve Babiak:
Originally posted by S Yu:
... Damn all these bank accounts...


You're saying that today because you don't look forward to the management of those accounts, but later on you will be thankful that you did create the separate accounts and did not commingle any funds (personal vs rental income vs security deposits in escrow).


Exactly.

Last time I counted, I had 23 business bank accounts, and while it can sometimes be a pain in the butt (for example, I have about 11 different checkbooks), at the end of the year, it makes accounting much, much easier...



Medium_lishproplogoJ Scott, Lish Properties, LLC
E-Mail: [email protected]
Website: http://www.123flip.com
CHECK OUT MY BIGGERPOCKETS BOOKS: http://www.biggerpockets.com/flippingbook


Mark Updegraff Donor

Real Estate Investor from Rochester, New York

Jul 13 '10, 05:33 AM


Originally posted by J Scott:
Originally posted by Steve Babiak:
Originally posted by S Yu:
... Damn all these bank accounts...


You're saying that today because you don't look forward to the management of those accounts, but later on you will be thankful that you did create the separate accounts and did not commingle any funds (personal vs rental income vs security deposits in escrow).


Exactly.

Last time I counted, I had 23 business bank accounts, and while it can sometimes be a pain in the butt (for example, I have about 11 different checkbooks), at the end of the year, it makes accounting much, much easier...



Ugg! There are so many extra fees for business accounts. The banking industry is such a scam... I'm still searching for that perfect local bank that treats me like a human and not their own personal ATM.
:roll:



Medium_leavesMark Updegraff, Updegraff Development LLC
E-Mail: [email protected]
Telephone: (585) 666-3069
Website: http://www.UpdegraffDevelopment.com
http://UpdegraffDevelopment.com Real Estate Investment & Property Management, Rochester NY


S Yu

Multi-family Investor from

Jul 13 '10, 10:44 AM


Yea, I will be opening a separate account for depositing this. I already have one for their security deposit. I need to create another one for the rental income/expenses. I will have to have a chat with an accountant/lawyer to see how best approach this.

Right now I am just going to open a personal checking account just for rental income/expenses.



Bryan Snyder

Jul 25 '10, 01:00 AM
1 vote


Originally posted by Mark Claire Updegraff:


Ugg! There are so many extra fees for business accounts. The banking industry is such a scam... I'm still searching for that perfect local bank that treats me like a human and not their own personal ATM.
:roll:


Find yourself a good credit union. Their fees/rates are usually better and the service more personal. We belong to the Olean Fed Credit Union in the southern tier and love it. The service, products and fees/rates are exceptional.



Charles Perkins

Landlord from Seattle, Washington

Jul 25 '10, 03:09 AM
1 vote


If your just getting started you may not be aware of the many advantages of being in business rather than just being an investor.

Businesses enjoy greater tax advantages not available to someone that is just an investor.

Businesses can offer asset protection.

Businesses open retirement opportunities that are not possible as an individual.

This is only a start. When I think about the many good reasons for being in business things like separating my business from my personal transactions don't seem to matter to much. You'll be very happy you did if your ever audited.

An investor will find that the IRS will dig into everyone of their bank accounts to determine the source of each deposit. If you can show that you have separated your activity an IRS agent is less likely to do this. If the business entity is a corporate or partnership entity they will have no reason to look at personal bank accounts for business activity.



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