How to keep property funds separate

12 Replies

Just listened to one of BP's podcasts and they talked about not co-mingling personal funds with property funds. What's the best way to keep everything organized and separate?

Any thoughts would be greatly appreciated.

I have a separate bank account for each property. Simple and cheap solution. 

I agree with @Alexander Felice . Before actually buying my first investment property, I set up an LCC and then requested and EIN (Social Security Numbers for businesses basically). The EIN allowed me to open up a Business Account at my credit union and it also allows you to open a business credit card.

Now I have rents deposited into the business bank account and pay all expenses with my business credit card. This way I don't have to worry about any co-mingling and it should make things a lot easier at tax time. All that being said, the much simpler and cheaper option as Alex pointed out, would be to just open another regular bank account for all property investment purposes. 

Don't hesitate to let me know if you have any (or anyone) has questions about setting up the EIN. It's actually a lot easier than you might expect and is an important first step to allowing your business to build credit. 

@Tim Little I would like to add to your post that you don't need an EIN and a business account if your property is in your personal name. You CAN do it with a business account, you just don't have to. 

If your property is in a business entity but you use a personal account to do transactions, you probably still won't get in any real trouble or anything, it's just not ideal. 

That brings up the question, do you set up an LLC or not? This will be my first property but I want to set things up correctly to start.

@Lesley Govan

Find a bank with great online banking.  The bank I use for my business accounts allows me to have all the accounts on one page.  If we need to move money between them, it is a quick, 3 step process.  This means you only need one checking account, but can keep separate accounts for Last Month's Rent, Security Deposits and Cap Ex accounts.

We set up a separate bank account at our credit union for business purposes. It has a checking account (for operational expenses), a savings account (for capital expenses), and a money management account (for tenant security deposits). We designated one of our credit cards for business use only. We set up auto pay for every reoccurring expense. If we can auto pay an expense to the credit card, we do. The credit card is paid by auto pay from the checking account. It is also tied to an airline mileage plan, so we reward ourselves often with free airline tickets!

Set up one LLC to run and manage all your properties (ie receive rent and pay expenses) then have that LLC send you a owners check for your personal use. Since the LLC is just a pass through entity, you can allocate tax related issues as needed. In Texas you can set up a Series LLC to offset the cost of incorporation.

All you need to do is a have a separate bank account to stay clear of the line. That account can be business, personal, whatever - it should match the mortgage. If you go FHA then you will be owning the home in your name, so I would just open a separate account somewhere to be used EXCLUSIVELY for the property. If you purchase the home as an LLC, then the LLC should have a bank account and you can use that for the property.

Banking follows the money, the money follows the mortgage.

@Lesley Govan I will simplify what others are over-explaining. Keep your personal checking account you have always had since before you purchased rentals. Use it to pay your personal bills and deposit your pay as usual. Open a new checking account for the rentals. Pay your bills for the rentals and deposit rents there. Keep a separate savings account for security deposits but tell the bank its for sec deposits when you set it up. Its a special type of account. KISS :)

Thanks for all the tips!

Originally posted by @Lesley Govan :

That brings up the question, do you set up an LLC or not? This will be my first property but I want to set things up correctly to start.

Search for previous discussions about LLCs by using the BP "Search the site" box. There has been many previous threads that discuss this question.

In a nutshell... 

1. An LLC is one type of business structure of several choices (sole proprietorship, partnership, corporation, limited liability company, limited partnership, limited liability partnership, etc.) It is not necessary for most small residential rental business operations.

2. In some states owning an LLC is expensive and/or the reporting is onerous and in others it is inexpensive and/or simple to set up and maintain.

3. For asset protection make sure you have a good umbrella insurance policy, 1M or more. An LLC is not good for asset protection unless the properties are held in the LLC and you do not personally manage your properties. It is a legal shield that could provide some protection if it is set up and maintained correctly, but a good attorney looking for assets might still be able to pierce it.

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