Separate Bank Account for First Rental Activities

10 Replies

I have just selected first Renal property in Memphis and will be closing in 2-3 weeks. I will be opening new personal Saving account and will be adding initial money to that account from my personal checking account. After that i am planning to leave that account just for the Rental activities to not mingle with personal account. I may go for LLC later in future after 1-2 years.

Below are some of my questions:

  • Should i put initial amount just to seed the account to new account from my personal account? or is it not advisable?
  • Should i take home warranty for rental property?
  • Who is better for property manager in Memphis: Crestcore Reality, Renshaw, Reedy and Company Realtors?

Really appreciate for insights. And looking forward to learn.

@Amit C.
Are you buying your rentals under your personal names or under LLC or Corp? What are your concerns for the funding? If you’re buying under your personal name, and as long as you keep a good record of what goes in & out of that account for the rental, you should have good visibility of how your rental is doing.
I have less than 10 units and I have all my rentals through 1 accounts and reconcile the info every year to see how my rentals are doing. I put in 6 months worth of reserve in my accounts for rainy day funds when I started and haven’t touched the money there.

I recommend a checking and savings account. 

Checking: rent goes in, bills go out. pay your mortgage, repairs, insurance, taxes, etc.

Savings: hold security deposits so you don't accidentally spend them. When your checking account gets a surplus, transfer those funds to savings so you can save up for your next purchase.

I don't have any personal experience with property managers in Memphis but CrestCore holds the highest qualification from National Association of Residential Property Managers. that's a good place to start.

I do not recommend a home warranty. They don't cover everything and they don't approve every request. Also, when you submit a request you often have to wait for their approval then hire their vendor. The vendors they use tend to be cheap and unreliable. I know many property managers will not manage a home that has a home warranty on it because they are so difficult to deal with.

Welcome to BP @Amit C.

I'd also recommend a Checking as well as a Savings account for rental purposes. However, most PM's can hold the security deposit for you as an added measure.

You can make an initial deposit into your new account, but I would leave income from your rentals as the only deposits to keep up with the payments and cash flow. 

Home warranties can be ideal, but the extra monthly expense can affect your numbers. If the property is in good condition, then you should be fine with only paying when something occurs as opposed to having a warranty in place for what if situations. On the plus side, home warranties are tax deductible however.

There are several successful property management companies in Memphis, so I'd speak with a few of them to gauge how comfortable you feel with them. I've been referring clients to Advantage Property Management as they are very communicative and easy to work with. They also offer 8% monthly management fees after your 10th property being managed with them.

Glad to hear you are investing in Memphis and wish you the best in your success!

@Amit C.

From my understanding, a separate checking / saving account will not limit your liability in case your tenant (or anyone else) from suing you for what you've got. Either put the property under its own LLC or bunch up with other properties when you have more, or buy a big enough umbrella insurance to cover those events. Talk to a lawyer to ensure you understand the pros/cons before you form a LLC to do asset protection as you will also have estate planning to think about if you have family to pass assets to.

Talk to your PM to see if they had experience with the home warranty providers and if they recommend the home warranty.  Some area don't have good providers so there is no point to waste that money for poor coverage.  I have home warranty on some of my DFW rentals to cover my AC.  However, I have not replaced my AC on the home warranty but they fixed a few things with $75 deductible each incident.  I figure if they replace my AC in 5 years I still come out positive in my warranty spending...

I also recommend separate checking and linked savings account with debit card.  Start the account with the minimum to avoid monthly fees.  I give this account number to the property manager to use for his rental and security deposits.  I use the debit card to make purchases for the property.  Security deposits can be moved to the savings account.  I sweep the excess rental funds into another account so I never have a high balance in the account in case of some type of fraud.  

I have a home warranty on every property except for one that has limited "systems"*.  I include the costs of the home warranties in my economics.  These warranties have saved me many times when expensive systems break down - which always seem to come at the worst times.  It is true that they do not cover every breakdown and you have to pay for certain items but I have mastered these contracts so my managers know when to call the warranty company and when to dispatch their own service personnel.  I have multiple contracts so I even get a 5% discount for multiple properties.

My warning to you is - if the AC/Heat failed tomorrow do you have enough cash reserves to replace the entire system with upgrades for code?  If not let the warranty do it.  You will have to pay for ducting, disposal and a few other things.  My latest one failed in May and cost me $1200 while saving me $8000. 

What else has the warranty paid for a new garage door, a new wine refrigerator (most will pay for 3 refrigerators in a house), a new induction cooktop ($1500), two microwaves and several dishwashers.  To date, warranties have replaced five AC systems with upgraded units.  FYI - this is why I also buy used appliances as I have no fear of them failing.  How much does that save me?  Thousands of dollars.

* Limited Systems - basically if the property does not have forced air AC/Heat then I will usually not choose a home warranty but I may buy specific extended warranties on any newer appliances.

I just finished reading Profit First. I highly recommend reading it and learning from his suggestions for how to use bank accounts. I have one "personal" account now that all my rental income/expenses flow through. I am also about to change over to an LLC so not I have to switch to a business account, at least that is what I'm being told. I believe some banks can link you business to an existing personal account rather than creating new accounts, so I would check on that.

I'll also being adding accounts and implementing a version of what Profit First teaches.  He recommends 5 different accounts to ensure you are paying yourself as you grow your business.

In general home warranties are a waste of $$ $400-800/year, plus each service call of $50-75 and often the bigger items only get partially covered, so you still pay a decent % of those no matter what.

The contractors they work with are often garbage and do crap work to just band-aid the issue, only to get another call and another $50 service fee

Yes, occasionally you will hit the home run with an HVAC etc, but in most cases, the insurance company is making WAY more $$ than they are shelling out....that's what they do. Do you really think they would be running a business where THEY lose $$? The average $$ they take in is WAY higher than what they pay out.... the house always wins in the end.

Convenient? ....yes..... but they are often hard to deal with too