How to set aside Reserves

Question

Hello Folks!

Got a newbie question.  I recently closed on my first rental apartment here in NY. The seller is renting it back from me for the first year at least. My question is do you have a separate account where your expenses get deposited into? (capex, vacancy, etc) Or is it just in the same account that the rent gets deposited into?

TIA!

Nathan Gesner · Answer

I recommend two accounts: checking and savings. If you have an LLC, the accounts should be business accounts in the name of the LLC. If you have more than one LLC, each LLC should have its own set of accounts.

Checking: Collect all income here, then use it to pay bills, the mortgage, or maintenance. If you are setting aside funds for capex, taxes, insurance, or other expenses that don't occur monthly, transfer those funds to Savings each month and hold them there until it's time to spend them. You will receive the security deposit in Checking but then transfer it to Savings.

Savings: Hold the deposit here so it's separate from operating funds. You can also hold money for maintenance, capex, taxes, insurance, or other projected expenses. When a tenant moves out, transfer the deposit back to Checking so it's ready to apply towards expenses or refund the Tenant.

If you end up with excess funds in the Checking account, I recommend you transfer it to a third account designated explicitly for future investments. That ensures you don't spend it on other things and know exactly how much you have to spend on the next purchase. If mixed in with your deposits and reserve funds, you may accidentally spend money you shouldn't have.

Mohammed Rahman · Answer

Hey @Carlo D. - firstly, congrats!

Secondly - It boils down to how you want it. Most organized landlords I know plan on keeping things separate.

Randall Alan · Answer

@Carlo D.

We have a separate account for both maintenance, as well as escrows for taxes and security deposits.  We transfer a preset amount of money into the maintenance account at each month - usually about $100-125/unit.  For us this works out to about $4,000/month.  We also track all of our self-paid insurance and property tax expenses for paid off properties and also transfer 1/12 of that money every month as well for the year.  That way when it is time to write a $40,000 check for property taxes in November, the money is sitting there waiting.  Likewise, with insurance policies for paid off properties the money is always there.  If you leave it in your main account, you don't really have any idea how much of that is not spendable at any given time.  By having the repairs & maintenance in a separate account it gives us a gauge of how much we are spending on repairs.  If the account is growing, we are spending less.  If it is shrinking, we are using it faster.

All the best!

Randy

Carlo D. · Answer

Thank you

How to set aside Reserves

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