Real Estate Investor · Atlanta, GA · Member since 2010 · 53 posts · 4 votes
From what I have read I should have an account for security deposits and an account for rent and expenses that are separate from my personal account. Assuming I will be targeting 10 properties here are a few questions I have:
1)Do these accounts have to be setup as "business accounts"? What are the negatives to setting up personal accounts?
2)When purchasing the home should I fund business account with my personal account for the down payment? Is it incorrect to pull these funds directly from my personal account for closing?
3)Is there any need to open an account for eac property? Seems that one account would suffice with the proper accounting per property.
4)If I am going to first purchase these properties in my name but later have them setup in an LLC that will be created at a later point, how does this effect the account? Once the LLC is setup can I add the LLC name to the account in place of my name or have both?
1. I would recommend setting them up that way...see below
2. Put the money in your business bank account and fund the down payment out of that account.
3. I find that separating them is helpful to see what is making and what is consuming money
4. Don't set up the account until you purchase the property. Fund the down payment out of your operations account for the entity that will later be on title
1. I would recommend setting them up that way...see below
2. Put the money in your business bank account and fund the down payment out of that account.
3. I find that separating them is helpful to see what is making and what is consuming money
4. Don't set up the account until you purchase the property. Fund the down payment out of your operations account for the entity that will later be on title
Another good reason for a seperate account is that we have our tenants go to our bank and make their rent payments directly into our rental bank account.. This way there is no way to say it's in the mail, no excuses why it's late and they get a reciept from the bank for the deposit.
I would set up the accounts seperate. And as far as the LLC I would set that up first if possible so when you go to the bank all you need to do is give them your articles of corporation and your tax id (ein number) to open the account. To me that shows buyers or investors that you are about your business having the legit paperwork and accounts set up as well. Some people look at things like that when doing business. I then would do funding of project from that business account.
If you maintain a business entity, you will want to ensure separation of personal and business funds. So, you need at least one business account, and you should loan money (i.e., move it from your personal account to your business account(s)), and then pay for all expenses out of the business account(s)...
Also, keep good records of the loans and repayments so that it doesn't appear that you're just comingling funds...
If you hold title to any rental property in your personal name, then you will not need to use a "business" banking account. There may be some advantages and disadvantages to a business banking account (may not allow electronic / online banking without paying extra, for example), but you should compare to a personal account to see which gives you better benefits. It is recommended by accounting types (not necessarily me) that each house should get its own account if you hold title in your personal name.
If you hold title in the name of a business, then you will be getting business banking accounts in the name of that business.
As far as I know a separate account for security deposits is not necessary unless you are a licensed property manager. This might be coming but not yet in my state.
As far as I know a separate account for security deposits is not necessary unless you are a licensed property manager. This might be coming but not yet in my state.
In my state, you have to place the security deposit into a bank account after 12 months, and I always have used an account that is not in my name. The banks require I get a W9 from the tenant so that the interest that accrues goes to the tenant (it's not my money after all) for IRS reporting, and I am simply named as an escrow agent on the account title.
In a few months I will have some new 12 month tenants, and I will be looking at a master account with sub-accounts for holding the security deposit money to see if I get any advantages with that arrangement.
But regardless, I strongly suggest that you do not commingle funds of any other party with your own funds, whether that party is an entity or a tenant.
If 1) I am not a manager and/or 2) don't have properties in an LLC, then whether or not funds are commingled is not relevant. There is no corporate veil to pierce and as long as funds are accounted for, and deposits are returned in a timely manner, then all is well for mom and pop in Oregon (as far as I know).
From what I have read I should have an account for security deposits and an account for rent and expenses that are separate from my personal account. Assuming I will be targeting 10 properties here are a few questions I have:
1)Do these accounts have to be setup as "business accounts"? What are the negatives to setting up personal accounts?
2)When purchasing the home should I fund business account with my personal account for the down payment? Is it incorrect to pull these funds directly from my personal account for closing?
3)Is there any need to open an account for eac property? Seems that one account would suffice with the proper accounting per property.
4)If I am going to first purchase these properties in my name but later have them setup in an LLC that will be created at a later point, how does this effect the account? Once the LLC is setup can I add the LLC name to the account in place of my name or have both?
1 - You should be fine with personal accounts, as long as the properties are titled in your name. Security deposit laws vary by state, but it's a good idea to hold in a separate account either way, since it's not your money.
2 - Yes, transfer into real estate account and fund from there. Deposit rent in that account and transfer proceeds back to personal account.
3 - That seems like overkill to me, as long as your accounting is good.
If 1) I am not a manager and/or 2) don't have properties in an LLC, then whether or not funds are commingled is not relevant. There is no corporate veil to pierce and as long as funds are accounted for, and deposits are returned in a timely manner, then all is well for mom and pop in Oregon (as far as I know).
There are more reasons than what you have stated here.
Death taxes. If you were to pass away, then those security deposits held in accounts you own are now subject to death taxes!
Lawsuits. If you were to lose a lawsuit, the amounts in security deposits held in your name can now be garnished to pay the judgment won in that lawsuit.
Have you attended landlord / tenant hearings in your area to see how judges handle security deposits? If you have it held in a separate account (even if in your own name - but I already advised against that), then the judge will probably not dispute the amounts you are holding for any specific tenant. If you mix money together, well just how did you keep track of which amounts came from which tenant?
Sometimes people don't recognize good advice when they are offered it.