What account to open

Question

Hi BP,

Started picking up rentals late last year and have 1 Condo that is currently rented.  I will be picking up another 12 rentals this month and likely a few more by years end.   My condo currently is under Company A and i have all proceeds linked to my personal bank account.

The 12 I will be picking up will be under Company B b/c I really do not like Company A much but under contract for another 6 months.  I will be switching the condo to company B when the contract ends.

When I close on said 12 rentals, I can not purchase it through an LLC per my mortgage broker.  So I plan on closing under my personal account and possibly put them under an LLC later which can potentially create some issues.

My questions are

1. I want to run this like a business and not mix personal & business accounts.  I would like to open a bank account under my name to receive the funds and pay for rental issues that arises through management company B.  Is a checking vs a savings better?  Does it matter?

2. I have a 1 million personal Umbrella that the condo is also under.  Should I take out another 1 million Umbrella just for the rentals?

3. Is it worth putting these places under an LLC.  I hope to eventually have 50+ rentals in 10 yrs

4. Is there any other issues I should worry about or prepare before I close on the properties at the end of the month?

Rob Beland · Answer

@Michael Wingive us a sense of what you own today for properties and what you have under agreement or will be purchasing in the next year or so. What is the approximate value of all the properties and what will your approximate total debt be?

as far as a bank account, you definitely don't want to be running anything that has to do with rental properties through your personal checking account. Set up a second checking account. It doesn't even have to be a business checking account. Just a separate account. I have my properties in a Realty Trust and the check says my name and the name of the realty trust on it.

You should have a linked savings account that you can use for reserve funds for things like capital improvements, unforeseen repairs, etc...put a little bit away each month and don't touch it for recurring expenses like taxes, insurance, etc...

Not purchasing through your LLC? You should talk to a different lender. You will find that over time the more properties you own you will no longer qualify for standard mortgages and you will have to go through a commercial lender. It's not the other way around.

Do you need an LLC? That's a big debate here on BP. Start with the total value of your equity in the 13 properties. Will you have exceeded your $1M liability policy? Have you priced out a $5M policy? Compare the cost of insurance to the cost to set up an LLC and factor in the annual filing fees and accountant/attorney fees. Liability Insurance is cheap and it's your best defense against a lawsuit (in my opinion). I'm not an attorney, an accountant, or a financial planner. I'm an investor with over 15 years of experience and I don't have an LLC and I'm of the opinion that they are simply unnecessary 90% of the time.

Do you have a business partner? If so, set up an LLC. Are there circumstances that would warrant setting up an LLC? Sure but this early on in the game you may not be in that position so why complicate things for yourself?

Michael Win · Answer

Its too late in the game to change mortgage brokers as we are closing in 2 wks plus I had the best rate by far.  In the future I will look around on putting them into an LLC if I choose that route.

CO A&B are management companies.   HE is the insurance agent.

Alexander Felice · Answer

per REG D you cannot use a savings account if it will contain 'excessive' transactions. This is almost universally SIX (6) per statement cycle. You will be confined to use a checking account.

Also, you don't have to mix personal and business accounts. You can own the properties under your personal name if you want but still have all the money flow through your LLC checking account. Technically, you should have NONE of these business transactions flow through your personal account. What I have is multiple checking accounts for the LLC for different systems. One for rent collection, one one for maintenance, and you can set up more for other reasons. Payroll, capX, etc.

Steve Vaughan · Answer

Unless these 12 rentals are 12 separate single-families requiring 12 separate loans, your lender is crazy to ask you to hold these personally.  I would talk to a regional bank directly and forget the mortgage broker if they are like-kind, like-addressed properties. Regional bankers have more than 2 brain cells. The post is vague as to who co A & B are (banks? PM co's?) and who He is ( the mortgage broker?) that said, "when I accumulate more WE can get a commercial policy." (No partner, right?) I will have no further comment on this and get back to my retirement.

Michael Win · Answer

The rentals should be profitable from day one b/c almost all units are currently rented.  I expect a cash flow of 50K the first  year.

My plan is to seed the account 20K from day one to cover any make ready/repairs.  And hopefully not have to put any additional money into it.  I would not touch the money or mix it with my personal accounts as I have enough income from work.  I plan to use any excess money after it is over 50K to buy additional properties.

I have a 1 Million per occurrence personal liability umbrella that my agent said would cover all of these rentals.  He said when I accumulate more, we can buy a commercial policy.

I plan on opening two accounts (one for condo, one for the 12) as there will be two management companies accessing the accounts.  I would not like for them to have access to the same account.  Once I switch the condo to company B, I will likely just use one account.

No business partner or will anyone in the future be involved in this.

I am leaning towards not doing an LLC at this time, maybe in the future to keep things clean.

Thanks for the information and help.  I just want to make sure I have everything set up once I close on the properties.

What account to open

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