How to avoiding commingling

Question

I have a question about how to avoid commingling of funds...I am about to close on my first rental property in my own name and have plans to transfer the title into an LLC later. Once I have the LLC, I will be able to open a separate bank account dedicated to the rental property, but until then, I will be funding expenses for the property from my personal account. For example, I am looking at rental property insurance quotes and will need to have a policy in place by escrow closing date and plan on paying for this from my personal account.

Right now I'm planning on keeping track of the expenses and taking screenshots/earmarking them on my bank statements. Is this sufficient? I'm wondering if I should open another personal bank account dedicated to this property even though I will have the LLC bank account shortly, but maybe that is unnecessary.

Thanks for any insight!

Joseph Palmiero · Answer

You will save yourself a lot of headaches if you just open a seperate checking account for your investment property.  You can also get a debit card for the account or get a seperate credit card.  This will simplify your record keeping.

Chris Seveney · Answer

Just keep it in your name and get an umbrella insurance policy. The LLC does not appear to be doing anything for you at this time. Save the money and keep it in your own name.

Luis Alvarez · Answer

@Joyce Kim I see this thread is a bit dated, and you're likely upon closing (if you haven't already), but just to provide a respectful counterpoint to what many take and run with:  covering initial expenses from your personal account is fine (even in most court's eyes) since these would be considered founding member costs and you would just "reimburse" your personal account once you have your LLC account established and (properly) funded.  Keep in mind that commingling is the easiest ways to make your LLC pointless, and to that point, as I've posted in other threads:

Do you need an LLC?  We would NEVER, EVER, recommend owning a rental property in any individual name/capacity. The properties need to be deeded over (with full Grant Deeds, not Quitclaim Deeds, to provide full rights and full title rights) to the LLC.  Not having an LLC in CA, especially because of the tenant friendly statutes and case law is just inexcusable.  Even if the annual filing fee was $1,600, it would still be worth the peace of mind.  This is a cost of doing business as a real estate investor.  All the asset protection and legacy plans I've come across utilize LLCs to properly compartmentalize your assets and to transfer assets easily when needed.

The Due on Sale Clause, "BUT the due on sale clause....etc...etc..."  yes, some version of this is found in every modern day mortgage, however, there are documented and regulatory exceptions for transferring title to property and NOT triggering Due on Sale....especially when the purpose of the transfer is to entities for the sake of estate planning/asset protection.  You just have to have the knowledge of where this is found and if and when the lender ever finds this (which they don't) then a half page letter citing the exception and a brief explanation covers this.  This is not an issue.

To Umbrella Insurance as protection, while you want landlord insurance coverage, as well as an umbrella policy. Please repeat after me: insurance does not protect you from liability...it only pays the litigation costs and damages once you've already been found liable/negligent and have a judgment in your personal name (if you didn't change title on that rental property and a cause of action).  That being said, an LLC DOES NOT make the property immune from liability...it does however, limit/contain it to the assets within that same LLC. This is something that is unfortunately vastly misunderstood throughout the real estate investor world. Generally, an umbrella policy covers any excess damages that haven't already been paid by your underlying policies, but those policies need to pay in the first place, and then the umbrella kicks in. I have insurances (landlord and umbrella) in place for my properties, but I know how insurance companies stay profitable (by only paying claims that they absolutely must pay). Keep in mind that these policies are drafted by sophisticated attorneys and drafters and typically have precise language and exclusions. How often do investors actually read through an entire policy and understand the exclusions?  I can tell you that attorneys sometimes don't even read them...

Steve Vaughan · Answer

@Joyce Kim if this will be a residential small rental (not commercial) and you don't have unrelated partners,  all an LLC will do (especially SMLLC) is limit your financing options, weaken your title chain and hazard/title insurance when you quitclaim, complicate your tax reporting and give you a new and unnecessary annual $800 bill from CA.

Russell Brazil · Answer

Why wouldn't you just close in the LLC?

David M. · Answer

@Joyce Kim

Your timing seems to be off... Form the LLC and get a bank account.  Then, transfer Title.  Having transferred Title, then proceed to change everything over.

Don't forget to refinance the your loan to the LLC, or do some other work around.

For your personally paid expenses, if you are going this route shortly I wouldn't bother with anything else.  Personally, a slightly cleaner way would be to make notes in your bank system (if it allows you), or make electronic notes on the pdf statements you can download.  Worse come to worse, print them out, annotate, and rescan (yeah pretty old school).  My favorite way is just to annotate in your own bookkeeping, which you should probably setup since it doesn't sound like you have a system.

P.S.  You do realize you really don't need an LLC, right?

Annette Clarabut · Answer

Congratulations on your first rental! This is a huge accomplishment and I hope it is a good house for you for years to come.

I am not an attorney, and this is not legal advice, but I agree with some of the other posters that you may not strictly need an LLC for your first rental.  We get advised from the attorneys to protect ourselves with LLCs, and I am not an attorney, but there is a cost for that. It will complicate some things and make some things more expensive. I wonder if having a good insurance policy might be protection enough until your estate reaches a certain point? It is completely up to you and your risk comfort level.

If you do decide that you feel more comfortable with an LLC, go ahead and open it before you close on your property. It doesn’t take long.  I use myllc.com and they can do it in an afternoon.  You can have all the information you need to open your bank account in one day.

The funds you use to pay the expenses are called owner’s contribution and there will absolutely be some that come out of your personal account before the business gets started.  The simplest way is to log them on a spreadsheet with the date, amount and purpose of the expense.  You’ll give this to your CPA after the end of the year along with the settlement statement from your closing.

There are some simple accounting software programs out there, some are even free.  The more organized your books are from the beginning, the better, so use the free software as long as you can.  Feel free to DM me if you have any questions about how to get the owner's contribution and the property onto your books.

Markus Shobe · Answer

Just get a separate account specifically just for your rentals. It will make your life so much easier. This will make record keeping and tax time much easier.

Kelly O'Keefe · Answer

I would agree with most people commenting and say you should use a separate Account. I know some software companies lets you pull the transactions into a separate spread sheet. specifically Digb allows you to connect to your banks account and it automatically characterizes transactions.

Jay Thomas · Answer

It's important to keep detailed records of all income and expenses, including receipts and bank statements. Opening a separate bank account dedicated to the rental property once the LLC is established is recommended. In the meantime, using your personal account temporarily for expenses is acceptable, as long as you document the transactions and reimburse yourself from the rental property account later.

How to avoiding commingling

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