Newbie Closing on 4plex

[Kelvin Williams]

Hello All!

I'm closing on my first rental property 4plex that I will be house hacking living in one of the units. For the rental income and to keep everything separate. The property will be in my personal name. Should I open a LLC for property management to collect rent, security deposit, and future maintenance fees with the bank account. Or should I just open a personal savings account instead. I plan on using a property management software regardless. I just want to keep that separation when submitting listings online with a LLC name for professionalism and communication purposes instead of using my government name.

Thoughts?

Best Regards,

[Nathan Gesner]

Quote from @Kelvin Williams:

Hello All!

I'm closing on my first rental property 4plex that I will be house hacking living in one of the units. For the rental income and to keep everything separate. The property will be in my personal name. Should I open a LLC for property management to collect rent, security deposit, and future maintenance fees with the bank account. Or should I just open a personal savings account instead. I plan on using a property management software regardless. I just want to keep that separation when submitting listings online with a LLC name for professionalism and communication purposes instead of using my government name.

Setting up an LLC for a single property is nonsensical. It can provide you a layer of separation, protecting personal assets from a lawsuit against your investment property, but it is almost never used/needed. The vast majority of cases against Landlords are dealing with security deposits. Even if you lose, you won't lose more than 5x the deposit. In all other cases, like a slip-and-fall lawsuit, most cases are settled out of court. For those that end up in court, they are typically covered by insurance. The only people I've ever seen lose a property to a lawsuit are Landlords acting very badly, like forcing tenants to have sex in exchange for rent. I set up an LLC when I got to over $1 million in equity. I know some owners that have several million and they still own all their properties personally.

You need two accounts: checking and savings. These accounts can be personal accounts if you own the property in your personal name. If the properties are split into more than one LLC, then each LLC will need its own accounts.

Checking: collect all income here, then use it to pay bills. Pay the mortgage. Pay for 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 to refund to the Tenant.

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