Bank Operating Account

19 Replies

How do you guys recommend setting up property operating accounts (e.g.; checking) for multi-family apartments?  Do you have an operating checking account for each property? One account for all your properties? #AskBP

Please simply for life, make it easier on your accountant and probably cheaper if you have an accountant and use ONE operating account for your rentals, from one to 500 units, (or more) you only  need ONE account.

Use accounting ledger and a "Chart of Accounts" break down your assets, liabilities and capital accounts in a category and give each a number, might be under the address number and then break into a chart of accounts under that number, Write a check, use the for line, acct. number/account. You can do this in any software checking register too.

This is  pretty much bookkeeping 101, if you're going to be in business, treat it like a business. :)

Josef, my recommendation is to ALWAYS have separate operating bank accounts and to form separate legal entities for each asset. My choice is an LLC (limited liability company).

I know it is easier sometimes, but never commingle funds if you have different investors in different deals.

While I normally agree with Bill G on most everything he posts, I will disagree on this one. I think you should have a separate account for each LLC (and a separate LLC for each apartment complex). As Brian stated, you don't want to co mingle funds if you have multiple investments and multiple investors. So yes, a separate operating account for each property.

P.S. I do not advocate LLC's for SFR but absolutely do for commercial real estate loans, which APTS and Buildings will be.

As an aside, each property will have it's own financials so having an operating account for each property also makes reconciling the data more efficient.

@Michael Worley So does this also apply if you get multiple single family homes to rent? Or each individual multifamily property? I'm new and confused. 

If you have single family homes with conventional financing I would say you can do whatever, if you're using LLC's you will want to keep the books separate. Part of that is keeping the funds from being mixed together.

Well, sorry folks, LOL, an operating account is NOT comingling funds! And having ten LLCs for each property is nuts, great for your tax guy hitting you up for all the work necessary and 9 more tax returns than you really need.

You need two accounts being a landlord, one Escrow Account and one Operating Account!

Do not comingle funds with an escrow account, except for funds held in escrow, you can hold 500 different people's money in one escrow account. .

You need a PERSONAL ACCOUNT, do not comingle funds between your personal funds and your business funds. Don't buy personal items with your company checkbook, write a check from the business to yourself, called "Drawing" and deposit that in your personal account, then go spend your money.   

Look at the largest (or any) building contractor building homes, do they have a separate company for each house they build? No, they don't. You may need a separate LLC for an apartment complex, say one of 50 units another with 200 units as they have different business concerns, but if Jack Smith owns both, you'll likely see a Jack Smith Holding company, where accounting is consolidated limiting the accounting and tax burden.

Those starting out, with limited funds have no business really of trying to do one property in one business. You can look up the threads of piercing the corporate veil where more than one attorney has mentioned that funding a company properly must be accomplished for it to be recognized as a legitimate business operation, this is significant with single member LLC or one closely held by family members.

You can't just have $652.84 in an LLC holding $50,000 in assets, that would be an underfunded operation, more like $2,000 can show that you can meet unforeseen expenses, $5,000 would be much better.

So, do you really want to fund separate LLCs with idle funds just sitting in 5 different operating accounts? No, I didn't think so.

Now, consider the scared side of new investors being sued. Liability! First, that is what insurance is for, have enough of it and you'll never lose your own house and bank account.

Okay, you think you're other properties are protected......if you lost a case and a judgment was made against you, all those other companies are separate assets, just like stock, and all of your assets become a target. The attorney for your claimant just comes through the back door, you didn't protect anything!

Human nature has not changed in the past 20, 25 years, in Missouri, like many states, we didn't have LLCs in the mid 90s, before that investors held properties individually in their names and simply got insurance. It's the way most newbies should start out too, I did and never had an issue. Now, that is assuming you don't break laws or do something intentional, but in those instances, an LLC won't help you either. If you are negligent your insurance covers it, you also have to be negligent. Just simple good management takes care of that negligence matter! Those renting a house today are no more inclined to sue you than they were 20 years ago.

When "the man" tells you that you need this medicine consider what angle they are playing from, the man is selling the medicine! Attorneys that set up LLCs are selling their product. If a tax guy accounting type tells you to have more LLCs, he's spending time on your books and taxes! Your insurance agent will be telling you that you must have separate policies for each company, true, but he gets to write new policies instead of one. Or, is someone telling you something because they don't have a clue and believed someone else?

I don't have a motive in telling you to keep it simple, less expensive, less burdensome, reducing your risk of messing up managing multiple companies or having two accounts, an escrow and operating account for each business and keeping more money set aside for each company than you really need to. Nope, I don't benefit from telling you that at all. Good luck!  :)     

This does depend on your situation.  If you own the properties by yourself and don't plan on selling them, you can do what you like.  Of course as @Bill Gulley camp as I do have a different LLC for each property and different investors in each. There is software to help you keep things straight, but bank account are the least of your expenses or even free.

I know owners that have no idea how their property is preforming.  As long as they are collecting rents and there is still money in the bank at the end of the month, they are happy.

Clearly with separate partners you need to set up separate LLCs. This debate is worse than that of iphone vs samsung galaxy. The only difference is the amount of fraud going on in real estate with self-proclaimed "gurus" selling new investors on the dream of wealth and infinite asset protection. 90% of the people on BP have a net worth of less than $500K and Id be willing to bet a good amount of those investors are home writing up their iron-clad operating agreement so when they are managing their first $50K SFR they won't have to tell their tenant who actually owns the property. They will transfer their $200/mo worth of cash flow between their holding company and their property management company. They will have spent more money on filing fees, investment seminars, consultants, accountants, attorneys, and toner ink then they actually earn in their first three years as an investor. But good luck setting up your LLC to be the beneficiary of your S-Corp with your other LLC being the managing partner. While you're at it, have your management company be your resident agent. At the end of the month you get to recalculate your net worth and see how much more wealthy you are.

May be @Jerry W. Esq. can throw in his 2 cents worth on liquidity requirements of an LLC to ensure the company is considered a viable, on going business concern and not a sham shell company. I suggest 5% of assets or about 6 months PITI on mortgages and operating expenses. Retained earnings or reserves become less as net worth increases. I doubt a company that holds a 100K property and has $216.32 in its name will cut it. That goes for all of your entities. So, fund all of your entities and let the cash sit there, idle because you can't consolidate the reserves. :)

I have separate accounts for my partnerships and only one account for everything I own by myself.

I can't imagine having a separate bank account for every property I owned. 

I am unaware of any specific percentage being used to pierce the corporate veil for retaining too little money.  The courts look at undercapitialized.  That means the company is unable to meet its normal obligations.  It is not as big of a deal if you are losing money and the company is going broke from paying its bills.  it is a big deal if that money is finding its way to your pocket.  In other word it makes $2,000 per month in rent pays out $2,000 per month in mortgage payments, insurance, repairs, etc having little money in the bank is not a big deal.  If it is spending $1,200 per month on mortgage and expenses and you pocket $800 per month you will be in trouble.  Good businessmen do not draw ALL or nearly all profit out of companies.  Unless you are in deals with different folks I would go with one company per roughly a million dollars of real estate.  You can get insurance for most of it and an umbrella policy is cheaper if you have the properties in the same name.  I cannot imagine the nightmare of filing a tax return,  doing books, filing corporate reports and minutes for each property I own.My cost for taxes could end up being $10K per year that would hammer my profit margin pretty bad.  Insurance would be higher and even balancing the checkbook for 15 to 25 entities would be hell each month.  Sorry this is so short @Bill G., hehe am beat just got done with a jury trial.

Very well said, @Jerry W.  

I'd say most suck every dime out especially starting off, reserves are important. I agree, going down the tubes is another matter. Thanks for your opinion! Hope you won your case, too! :)

Thanks @Bill G., I did, it was easier than most took the jury 19 minutes for a verdict on a felony.  My second fastest verdict ever.  Still takes way too much time out of my week hehe.

Way to go Jerry! Congrats!

Beware all, better be good in Thermopolis, Wy. there's real justice there and you'll get nailed !   :)

Whoa. Ask about how many bank accts you need and here come the LLC for every little house folks. Thanks @Brian Adams for the tangent.  If I were a CPA I would want every bedroom to be in it's own LLC I suppose.

As you grow, it is inevitable you will have multiple accts. I run all of my rents through my mgt co, so that has an acct or two, plus my 5+ unit apt buildings are in 1 LLC so that has an acct as well. Deposit funds can be with the same bank and a sub-acct of the main one you use if you choose, as I'm sure has been mentioned.

In the end for me, the number of bank accts should be as limited as possible, obviously. Simple rental property software works well for me to keep track of individual property and individual unit income and outflows.  The number of bank accts then becomes less relevant for tracking and tax filing.

@Steve Vaughan , you know what CPA stands for right???... A Complete Pain in the Arse!!

With almost 20 years as a CPA, I unfortunately have seen one of my clients lose a big chunk of their net worth due to them not setting up the entity structure correctly and co-mingling business and personal funds in the same bank account. 

At the end of the day, the key is to have the right asset protection plan in place and if that requires additional bank accounts, in my book it is worth the additional cost.

@Brian Adams haven't heard that one! I knew the alternate to PHD, not CPA. Thanks for taking the lighter side on my rant.  I agree, asset protection and non co-mingling.  Common sense to most of us.  Thanks!

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