How to structure bank accounts

Question

I'm a new investor in Fort Worth, TX. I just bought my first SFH and am about to buy a second. I'm wondering which is the best way to structure the bank accounts. These first properties are in my name and not an LLC or other entity. I've started out with a checking and savings for each property. I've heard that in Texas, the tenant security deposits have to be in a separate account.  Does that mean there has to be another account just to keep the security deposit in?  I've heard some investors say they have an account for taxes only.  Which account do you keep money set aside for cap ex, vacancies, expenses, etc.? I've heard if your properties are in LLC's you should keep them separate.  If you kept it all separate, it seems you would have to have multiple accounts for each property.  could someone shed some light on the best way to do this.

Todd Plambeck · Answer

I am not an accountant, nor do I play on on TV but I do pay for one.  Ideally, you would have three physical bank accounts:  a cash account which holds the bulk of your money, an operating account which your checks are written from and bills are paid, and a deposit accounting to keep tenants deposits separate from your money.  All the other "accounts" you mention that you are accruing for, cap ex, vacancy, taxes, etc., are accounts set up in your accounting system.

Rick Via · Answer

Thanks for the feedback, it really helps a lot to know what other people are doing. I've been wrestling with this question and though I'm just starting out, it helps to learn from experienced investors so I don't find the hard way later that I should've done things differently. my lawyer is setting up a series LLC as well. This type allows you to put multiple properties in the same llc, but in its own series within that separates them for individual liability protection. I finding though that Banks tell me if I'm borrowing through the llc, I have to go the their commercial lending department which charges higher interest rates and shorter terms. Since I can acquire up to ten properties through residential in my own name with better terms, I'm thinking of doing this before putting properties in the llc. This is against what my lawyer recommends, but it seems to be almost 50/50 among BP members on the question of llc vs not and I know investors who never used them, one with over 60 properties. I'd appreciate any responses to help me see if my thinking is way off track. Thanks.

Rick

Bart H. · Answer

@Rick Via  I preface this with, I am not  a lawyer and this isn't legal advice.

But my understanding is in Texas you have to have separate accounts for deposits if you are a property manager, realtor etc.  I do not think that applies to non licensed property owners.

My wife and I personally have a separate checking and savings account that are exclusively used for our properties. (we are in the process of putting things into an LLC.)  We actually take a portion of our gross rents and put them into a savings account each month in anticipation of future large CAP EX expenditures such as roofs, heating/AC units, appliances etc.

The rest we leave in our checking and cash flow other smaller repairs, make readies, pay for mortgages and utilities etc.

In addition we have a credit card we use exclusively for our properties.

If nothing else this helps when it comes time to do taxes.