Organizing for my first investment

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Organizing for my first investment

Mark Rosenberg
Rental Property Investor · Tampa, FL · Member since 2020 · 23 posts · 16 votes

Hi All,

I’m currently in the process of purchasing my first investment property and was curious how you organized your finances to prepare:

1) do you have a separate bank account for your investment properties?

2) what % do you save for capex or repairs? (My first property will be a brand new build)

Any other valuable information is much appreciated. Thanks!

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Jody Sperling
Omaha, NE · Member since 2020 · 611 posts · 665 votes
5y

1) No need to have a separate bank account for your first investment property, but it doesn't hurt either. Because we only have one investment property at this point, it's all under one bank account. We don't even have an LLC because if someone wants to sue us, the lawyer fees alone will push the zero button for us. (That said, we have a six-figure emergency fund. SO we take resources very seriously and invest cautiously.)

2) This depends how you structure your loans/lines of credit. If you have a line of credit at a low interest rate, why keep YOUR cash available for CapEx? Liquidity matters. We ride our lines of credit down with aggressive repayment between investment purchases. (Especially in your case with a new-build, your CapEx will be cheap over a 5 to 10 year period.)

3) Don't go with a captive agent: Farmers, State Farm, All State, etc... I'm a licensed P&C agent who works for an insurance carrier, and I can tell you from experience that independent brokers are the best option. They'll quote your properties through numerous carriers and find the best blend of coverage for the cost. High value. I like Global Green agencies, but any independent will be excellent.

Best of luck! Investment properties are fun, and lucrative if you treat them like a business.

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  • Jody Sperling
    Omaha, NE · Member since 2020 · 611 posts · 665 votes
    5y

    1) No need to have a separate bank account for your first investment property, but it doesn't hurt either. Because we only have one investment property at this point, it's all under one bank account. We don't even have an LLC because if someone wants to sue us, the lawyer fees alone will push the zero button for us. (That said, we have a six-figure emergency fund. SO we take resources very seriously and invest cautiously.)

    2) This depends how you structure your loans/lines of credit. If you have a line of credit at a low interest rate, why keep YOUR cash available for CapEx? Liquidity matters. We ride our lines of credit down with aggressive repayment between investment purchases. (Especially in your case with a new-build, your CapEx will be cheap over a 5 to 10 year period.)

    3) Don't go with a captive agent: Farmers, State Farm, All State, etc... I'm a licensed P&C agent who works for an insurance carrier, and I can tell you from experience that independent brokers are the best option. They'll quote your properties through numerous carriers and find the best blend of coverage for the cost. High value. I like Global Green agencies, but any independent will be excellent.

    Best of luck! Investment properties are fun, and lucrative if you treat them like a business.

    5Reply
  • Mark Rosenberg
    OP
    Rental Property Investor · Tampa, FL · Member since 2020 · 23 posts · 16 votes
    5y

    @Jody Sperling all very useful information. I very much appreciate it!

    2Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    5y

    I don't have a separate bank account for investments.  I don't budget per se, but I always have a good balance in my account to cover the unexpected.  If you aren't good at saving, a separate account would be good as it will encourage you to save.  also do automatic transfers to that account with each paycheque.

    For insurance, regular rental insurance through the same company that has my home insurance.  Many will give you a discount if you bundle them, so find one that gives you a good rate.

    2Reply
  • Nick Robinson
    Rental Property Investor · Murrieta, CA · Member since 2020 · 338 posts · 343 votes
    5y

    @Mark Rosenberg 
    1. I do have a separate account for my investments from my personal account. I do this because it keeps things separate and easier to see how my investments are doing. If this is your first rental and its a residential property you are probably not going to put it in an LLC, so it is more for you if you want to keep a separate account. I would make a seperate account so that way you have money set aside for maintenance so you do not accidently spend or feel like your pulling out personal money to pay for expenses.

    2. % to leave for CAPEx will depend on building.  If you are buying a new build you probably or going to have minimal repairs and CAPEx expenses.  Depending on price and size of the building will also determine amount but I would guess start with $5-10k at the beginning and as it cash flows add money to the account till you reach 10% of the value of the building.

    3. Just regular renters insurance should be fine for this property

    4. Would not put an LLC as the owner of this building because the set up and fees are going to kill your cash flow and you are buying a new build which is a "safer" investment but is killing your Cash Flow off the bat. I dont know what the fees are in FL right now to set up and yearly fees, but in CA I have to pay $800/yr because I "do business in CA" even though the rental and PM are in AZ

    5.  What made you decide to go with a new build?  Have you looked into multi-family?  I think if you look at the advantages and the numbers you will see the more doors you have the better and safer your investment is.  If you own a house and they move out you lose 100% of your income if you own a four plex you only lose 25%.  Just food for thought.

    4Reply
  • Mark Rosenberg
    OP
    Rental Property Investor · Tampa, FL · Member since 2020 · 23 posts · 16 votes
    5y

    @Theresa Harris

    I really appreciate your insight and time to respond. I'm normally a good saver and organizer so if it's not entirely necessary to separate, that's interesting. Do you have any thoughts on when in the investing process it's best to LLC and the advantages?

    Thanks again!

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    5y
    Originally posted by @Mark Rosenberg:

    @Theresa Harris

    I really appreciate your insight and time to respond. I'm normally a good saver and organizer so if it's not entirely necessary to separate, that's interesting. Do you have any thoughts on when in the investing process it's best to LLC and the advantages?

    Thanks again!

    I don't have any LLC, so am not the best person to ask about that. I think some people use them when they have a lot of investment properties.

    0Reply
  • Mark Rosenberg
    OP
    Rental Property Investor · Tampa, FL · Member since 2020 · 23 posts · 16 votes
    5y

    @Nick Robinson 

    Firstly, I really appreciate your insight. Great responses. To comment/answer your questions:

    1) After reading multiple responses to having a second bank account, I probably will set one up. Especially because I want to have multiple properties and it's better to be proactive from the start (man there is so much involved with getting going! It's kinda fun though). Would you mind advising at what point in an investment career its best to LLC?

    2) It's a 1,550 Sq. Ft. 3b2b. So you'd say $5-$10k is sufficient for a new build? I like the goal to reach 10% of the value of the building (for expenses right?).

    3) Got it. I liked Jody's suggestion of going through an independent company vs. one of the larger companies.

    4). As I mentioned above, would you mind advising at what point in an investment career its best to LLC?

    5) Very interesting you mention a multi family. I was between that and a single family for a while, pondering. I honestly was okay with either for my first investment. The reason I picked Port Charlotte is because (from what I can see by demographics and occupancies), it is a very leased area. Find picture attached for rented vs vacant...Interested on your thoughts on this pretty crazy demand from what I can see.

    New build was more of a personal preference. I really want to buy and hold so I feel like having a brand new property will be appealing for many reasons. Also as you mentioned capex will be less because of this. My gut tells me that my new investment will be a multi property but I like the decision to go with a new build in a growing area as my first.

    Once again really appreciate your time. Let me know your thoughts on the above whenever.

    Mark

    0Reply
  • Nick Robinson
    Rental Property Investor · Murrieta, CA · Member since 2020 · 338 posts · 343 votes
    5y

    @Mark Rosenberg
    I know I started one before I did a 1031 exchange I did to go from a duplex to an 8-unit. I think for every commercial property 5+units I will get an LLC. A lot of it has to do with how much risk there is or how risk adverse you are. I have a buddy that has 4 SFR and he has them in his own name and just has an umbrella policy that I think he told me was around $1.5mm. When you look at it that way all of his properties market value are about $1.2-1.3mm. The other consideration is taxes, since I have it in an LLC I take all my personal deductions and than get the deductions from the LLC on top. If you have it all in personal they would be grouped together. Depending on how much you write off personally this may or may not be that big of deal.

    2. Seems like a good number to me.  You will learn a lot more about the building and how much you should set aside the longer you own it.

    3. Sounds good

    4. When you feel like you have acquired enough assets that you feel like you need more protection. Then it is up to the individual person how many properties they want to put in each LLC. I would not advise putting all of your properties in one LLC.

    5. Multi-family just makes more sense numbers wise to me but to each his own.  There is more than one way to skin a cat.

    6. How you run all the numbers?  What is the rent? Whats the cost?  Are you buying it out right or getting a loan? Your in Tampa and I think you said it is in SC so I assume you are getting a PM.  What is the PM costing you?

    1Reply
  • Nick Robinson
    Rental Property Investor · Murrieta, CA · Member since 2020 · 338 posts · 343 votes
    5y

    NVM it is about an hour and a half away from Tampa, FL

    0Reply
  • Mark Rosenberg
    OP
    Rental Property Investor · Tampa, FL · Member since 2020 · 23 posts · 16 votes
    5y

    @Nick Robinson

    I am working with an investment RE company called Norada. You may or may not be familiar with them being from California (they're based there).

    They've been extremely helpful in the process being my first. They have strong partnerships which streamlined a lot, so the mortgage company, construction company and process in general has all been smooth and investment minded. I'm working with a person on their team I really like too (both credibility and personality wise).

    Numbers wise:

    Property: $221k

    DP & Closing: $50k - rest loaned through conventional. Low mortgage 30 year will be

    Renting: Mortgage should be around $838 a month and the property should rent for around $1,625.

    Taking into consideration a potential 5% vacancy rate, 3% maintenance rate and 6% property management rate, CoC return for rent only should be around 8% (with roughly the expenses listed). Hoping for a 4% appreciation of the property YOY...

    To be transparent, I'm still very much continuing my education on running my own numbers. I asked a ton of questions in the initial stages. At first the pro formas had 0% vacancy and 0% maintenance listed, which I adjusted for what I thought was more realistic numbers. The process will definitely be a sort of a learning experience, but show me someone who's first investment property it wasn't. Thanks for your thoughts again.

    Mark

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  • Nick Robinson
    Rental Property Investor · Murrieta, CA · Member since 2020 · 338 posts · 343 votes
    5y

    @Mark Rosenberg Congrats at getting started into real estate!  I have not heard of Norada but I do not look up turn key investment companies so thats not saying much.  I have personally never bought a turn key flip, but from flipping through the forums there are a lot of people that buy them and have had success with them.  I am sure as you begin acquiring them it will start building up your passive income and put you in a great position.  If you have read posts on the site everybody has their own strategies or things they are looking for but everyone has the same goal of retiring and living on their passive income and being a full-time RE Investor.  As long as you are consistently buying properties that produce positive cash flow and run your numbers correctly you will be fine. 

    1Reply
  • Mark Rosenberg
    OP
    Rental Property Investor · Tampa, FL · Member since 2020 · 23 posts · 16 votes
    5y

    Thanks @Nick Robinson. Slight correction would be my plan is to just buy and hold and use my equity from current investments to fund future projects. Norada helps to consult in really all areas. It's been helpful for me finally taking that first step.

    What are your thoughts on the %'s I put for vacancy and maintenance? I understand you may not have researched the area much but I wanted to be conservative to account for potential not best scenarios. When I saw those at 0% I was like uhh? It may be a brand new build in a high demand area but no way 0% is accurate. Once again, a lot to learn and if there's one thing that interests me most it's how other people do their due diligence and run their numbers. I know that's a loaded ask.

    1Reply
  • Nick Robinson
    Rental Property Investor · Murrieta, CA · Member since 2020 · 338 posts · 343 votes
    5y

    They usually say a building will run around 35-45% expenses.  So when I do a quick analysis I just do the 50% rule.  Obviously being a new build you would probably be under that 35% number.

    $1,625    rent
    -35%        expenses 
    -6%         PM
    $958.75 NOI
    -$838       loan
    $120.75/mo CF      That's $1,449/yr  so 2.9% CoCr.  Then you have $1,792.94 (estimate $176,000 loan @ 4%) principal reduction thats a 3.59% return.  The last value to look at is the appreciation if you think its 4% the first year the building would go up $8,840, which is a 17.68% return on your original investment

    So I believe that is a total of 24.17% on your money the first year.  When I look at it I mainly look at cash flow because appreciation is speculation and I know if my cash flow is good I can sit on that property forever. Just to be conservative I would probably be more around 2% appreciation which still leaves you with a 15.33% return.  That's way better then any bank, money market, or index fund.  You will also get tax advantages to help reduce your tax burden on your W-2 job.

    2Reply
  • Mark Rosenberg
    OP
    Rental Property Investor · Tampa, FL · Member since 2020 · 23 posts · 16 votes
    5y

    @Nick Robinson Awesome quick analysis method. You're the man. 

    Last question, and I hope to keep in touch as time continues to circle back around on this conversation. Could you elaborate on "principal reduction" and how it effects the bottom line?

    0Reply
  • Nick Robinson
    Rental Property Investor · Murrieta, CA · Member since 2020 · 338 posts · 343 votes
    5y

    @Mark Rosenberg
    Sure when you take out a loan on the property you have a monthly mortgage you owe the lender.  In that monthly payment some of that amount goes to principal, the amount you borrowed, and some goes to the interest you are charged for borrowing their money.  As time goes on more and more of your monthly payment will goes towards the amount you owe.

    Example on $176,000 loan @ 4% Principle reduction  BTW I made a mistake because my mortgage calculator was set to start the loan in Jun so you actually would pay more to principal than I initially told you its actually a 6.2% return bringing your total return to 17.94%
    year 1   $3,099.42
    year 2   $3,225.70
    year 3   $3,357.12

    Hope that makes sense

    1Reply
  • Erwin F.
    Rental Property Investor · Seminole, FL · Member since 2014 · 85 posts · 68 votes
    5y

    1.  I would recommend a separate bank account and separate credit card.  That way accounting at the end of the year is easier to decipher.

    2. Per CapEx. I'd put between $5k and $10k, but I'm pretty conservative.

    2Reply
  • Mark Rosenberg
    OP
    Rental Property Investor · Tampa, FL · Member since 2020 · 23 posts · 16 votes
    5y

    @Nick Robinson Makes sense but why am I having trouble understanding why paying off my principal counts as return? Because it's then equity? Also, could you clarify how you got those 3 year numbers? Appreciate it

    0Reply
  • Simon W.Business Member
    Real Estate Consultant · Lehigh Valley PA & New York City · Member since 2013 · 1k+ posts · 657 votes
    5y
    Originally posted by @Mark Rosenberg:

    @Nick Robinson Makes sense but why am I having trouble understanding why paying off my principal counts as return? Because it's then equity? Also, could you clarify how you got those 3 year numbers? Appreciate it

    Wow I just spent the whole time reading this thread :)

    Don't focus so much about the principal reduction as return. Basically, when you pay down your mortgage that means your liability goes down therefore your Equity will be more on the positive side. 

    Asset = Liability + Equity

    Don't focus too much on this, focus on the cash flow

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  • Mark Rosenberg
    OP
    Rental Property Investor · Tampa, FL · Member since 2020 · 23 posts · 16 votes
    5y

    @Simon W. Thank you sir.

    1Reply
  • Nick Robinson
    Rental Property Investor · Murrieta, CA · Member since 2020 · 338 posts · 343 votes
    5y

    @Simon W. @Mark Rosenberg
    I agree I was just looking at total investment for Mark. I usually only care about my total cash return. Not even super concerned with the CoCr %. For instance I buy multifamily so I am looking at bigger deals but I want at least a total cash return of $24,000/yr. and in an appreciating market with a solid building I am ok with a 5% CoCr. Everyone has to start somewhere and I know I started with a duplex living in one side. When I moved out only made like $600-800/mo. which is why I went to bigger buildings because looking at SFR the %return is higher but your only making $100-200/mo. So if the tenant moves out or you have a repair issue that eliminates all of your cash.

    0Reply
  • Michael Deering
    Rental Property Investor · Lehigh Valley, PA · Member since 2017 · 200 posts · 191 votes
    5y

    1. Consult your accountant about the bank account.  I think even with one property it's good practice to separate funds so you can see the  +/- cash flow and you're used to it for when your portfolio grows. 

    2. Check out the Census website for your areas vacancy rates and plan accordingly. My area's rate is 2.5% vacancy and I plan for 5%. For Capex and repairs I budget $1,200 per unit annually, this works out to be ~10%.

    3. I find working with local lenders and insurance vendors is best. 

    4. I LLC my properties. Beside the legal protection it provides more flexibility with tax reporting. I also manage the properties under a sublease to a separate LLC.

    Lenders will lend to an LLC entity if the applicant entity is a qualified applicant (that's you) Get friendly with an account that is also a RE investor.

    1Reply
  • Grey Stone
    Investor · Palmdale · Member since 2016 · 112 posts · 80 votes
    5y
    Originally posted by @Mark Rosenberg:

    Hi All,

    I’m currently in the process of purchasing my first investment property and was curious how you organized your finances to prepare:

    1) do you have a separate bank account for your investment properties?

    2) what % do you save for capex or repairs? (My first property will be a brand new build)

    Any other valuable information is much appreciated. Thanks!

     1) Absolutely! I have a separate account for each door and this helps me keep things fairly organized. I print out sheets of checks and I carry one sheet for each door. This helps me soooo much at the end of the year for taxes. If I had 1000 doors, this might be ridiculous, but it works very well for me now.

    2) It really depends. I think this is more relative to property type and location. For most, I set aside $150/month.

    3)Landlord Liability Insurance (carry with the mortgage) up to $500k per property and an umbrella policy. I also do this because I live in California.....a very litigious state.

    4) No LLC, just good insurance.

    *Bonus, you might want to consider estate planning. I think this usually gets overlooked. Don't use it as a reason to slow you down, but as a reason to push forward faster.

    1Reply
  • Mark Zermeno
    Rental Property Investor · Houston, TX · Member since 2016 · 37 posts · 1 vote
    5y

    @Erwin F. You out $5-$10 k for capex over how many years?

    0Reply
  • Erwin F.
    Rental Property Investor · Seminole, FL · Member since 2014 · 85 posts · 68 votes
    5y

    @Mark Zermeno, here's what we've spent on capex over 6 years of having 4 rentals.  

    1. 1. ~$4k on AC replacement
    2. 2. ~$200 on Fridge
    3. 3. ~$800 on 2 Dishwashers (they were old)

    We have a mix of condos, a townhome, and a house.  So the only one with major fixes is the house, but everything was replaced.  This is the property where I put the most away for capex since I have the most things to handle.

    0Reply
  • Erwin F.
    Rental Property Investor · Seminole, FL · Member since 2014 · 85 posts · 68 votes
    5y

    @Mark Zermeno... I may have misunderstood your question :)

    I put that away upfront when the property is purchased.

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