I will be closing on my first rental property next week and Im looking for suggestions on how to manage the bank accounts. Based on my research, Im going to open a checking account for rental income and savings account for the security deposit. What is recommended when it comes to the funds I will be using to fix up the property? Do I transfer that money to the new checking account and make all withdrawals from there, or is it ok to keep it in my personal? Side note- only 1 rental property and no LLC.
Thanks in advance!
we have 35 and just one working account and one Sec deposit account.
if i need to use my personal money i just use it straight from the personal account, i just TAG it in quicken property management software.
i never deposit rent into my personal account, just because i dont need to.
quote me if you have any questions because i wont follow the thread otherwise
@Rickie Mincy congrats on making your first purchase.
Aseperate checking and savings account is the way to go when first starting out. I did exactly that when I closed on my first rental, depending on your bank when using your online banking you can assign different accounts nicknames to help you easily separate the different accounts. As far as making repairs you can just use the money right from your personal checking account, since you are not creating an LLC the money from this rental will all go on your personal taxes. the Biggest thing to remember is to document every single thing you spend money on for the rental, to will assist your accountant when tax time comes.
Hi @Rickie Mincy . Congrats on your first property!
The BEST way to avoid any issue, is to never commingle your personal funds with your business funds. Even though, your not setting the property up in an LLC, it makes life much easier for your CPA to plan your taxes when you can hand them a bank statement for the property instead of having to sort it out as you go. Hope that makes sense.
If you're going to be using your funds to fix the property, just put XYZ in the business account, and make sure you note it for your CPA so they can deduct it accordingly.
I'm assuming this is a SFH and not a MFH, so putting it into an LLC can be problematic with banks anyways. But, consider trying to do so in the future. If something were to happen at the rental, and you're sued, you're personal assets, along with the rental, can be at risk. Sadly, we live in such a litigious society anymore, it's better to be safe than sorry.
Congrats again and I hope you have many more rentals in your future!
All the best,
I would open two checking accounts actually. I would label one account as your "Operating Account" and the other your "Deposit Account". The reason for the checking account for the security deposit is that depending on how long you hold the deposit (and your state laws) you may or may not be allowed to collect interest on the deposit. Just to be safe, I always use two checking accounts. The "Operating Account" will have all of your rents in, expenses out, etc.
As far as using the personal money for repairs, I would absolutely transfer the money into the account, then pay for the expenses directly out of your "Operating Account". It will always be easier to track that money over time and will make life much easier come tax time. You can just consider your personal money in as "investor contributions". Good luck and congratulations!
@James Triano That's a great point, I'll take that into consideration, thanks so much!
@Rickie Mincy just finished reading "The Book on Tax Strategies For the Savvy Real Estate Investor" by Amanda Han (you can find it in the "Education" tab up top ^. It's a good read, and covers banking. If you do pay for sudden expenses out of your pocket, have the business reimburse you as soon as possible. It makes it much easier to track your expenses for the business.
If you haven't read the aforementioned book, I suggest picking it up. It's a good, quick, read (and it's tax deductible ;D ).
Thanks @Aaron Smith I am happy you enjoyed the book!
@Amanda Han HOLY COW!!! I didn't even tag you on the thread!! I'm kind of scared you knew I mentioned you ;oD I did enjoy it. I have my accounting degree and MBA, and I couldn't agree more with your covering finding a CPA who works mainly in REI.
I did, however, do a rookie mistake and form my LLC before I bought property. I figured it'd make placing the property into the LLC easier. But, what's done is done. I knew I needed one either way..
Anyways, thank you for producing your book. I think it's a good read for those starting in REI.
All the best,
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