Separate business account or separate personal account?

Question

I am in the process of closing on a duplex here soon, also inheriting a tenant so I'm ready for that too, very excited/nervous, I am ready for the ups and downs of managing rentals.

But I was wondering if anyone knew if it would be ok to open up a separate personal checking and savings for the property, since the mortgage is under my name and not an LLC, or should I go ahead and create an LLC to open separate business checking and savings? I hope my question makes sense.

Thank You!

Scott Smith · Answer

Hey @Moises Rafael

This is how I often break down asset protection for new clients: there are "four pillars" of asset protection. The first pillar is a good insurance policy as that cover the majority of your exposure. However, it only protects you from one type of liability: accidents.

After that you want to compartmentalize your assets, which is often accomplished through the use of LLCs or corporations. I personally find the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely - check out this article to learn more. The third pillar is somewhat similar - you want to separate your operations from your assets. That means you establish a Traditional LLC to carry out the operations of your investments, in order to separate the liability from your assets, including: paying property management, paying contractors, collecting rent, marketing, etc. Finally, with the use of Trusts while establishing these structures you can add a level of anonymity by removing your name from public record.

The one issue you haven't mentioned, yet, is the Due on Sale Clause. This is essentially where most major banks will refuse to allow you to transfer a property into an LLC under the threat of recalling your note. There is a way to work around this as laid out in the article I will link, but it can be a little stressful. If you know what you are dealing with prior to running into it, things aren't so bad - it just scares people out of using LLCs when it shouldn't...

Being that you are new into real estate investing, I would really encourage you to find professionals to work with you who are also experienced in real estate investing. If you have a good team of people around you, they can often help you solve problems before you run into them.

Best of luck to you with your future investments! Feel free to connect if you have more questions.

Nathan Gesner · Answer

@Moises Rafael I'll start by answering your original question. There's no need to make things complicated. I know many owners (myself included) that do not place properties under an LLC. It does add a layer of protection but it also adds a lot of cost and complexity and may not be in your best interest.

I set up a separate checking and savings account for my rentals. Rent goes into the checking account. I pay the mortgage, taxes, insurance, and repairs from the checking account. I transfer the remaining funds to the savings account where it sits as a reserve or is held until I'm ready to invest in something else. Keep it simple.

Scott gave some good advice but he missed what I consider to be the most critical method of asset protection available: obey the law and treat your tenants honestly and fairly.

Chris Allen · Answer

@Moises Rafael

I am definitely not the best qualified to answer this question and honestly, your best bet would be to talk to a professional about it, but I will give my opinion anyway and hope to see others give a better answer. First, is this your first property, what are your long term goals, are you going to be living in it, etc..?

1) If this is going to be a househack and is your first property to rent out, it would be cheaper and easier to just separate your personal account. When you start to get more properties, then you should create an LLC.

2) If this is not a househack and you have a couple of rentals already, it would probably benefit you more to go ahead and start doing business under an LLC that can give you a level of protection from your personal assets.

It cost a little money to set up an LLC but is relatively easy, so you should feasibly be able to set one up anytime. So you need to evaluate where you are at in your real estate journey, what your long and short term goals are, and should talk to a CPA or attorney about what makes more sense for your situation. Hope that I was able to help in some way!

Ned Carey · Answer

@Moises Rafael this is a question to ideally ask before you buy a property not after.

It is perfectly OK to open separate bank accounts in your own name for your rental business if you own the property in your own name.  (Who's name is on the mortgage doesn't matter, what matters is who owns the property)

Is it smart to own property in an LLC instead of your own name? There are many factors to be considered. There are lots of posts here about the subject. There is no one right answer for everybody.

Scott Smith · Answer

There are too many variables that would play into this situation that I am not privy to before I would give advice on this. I can suggest general asset structures, but when it comes down to the details of investing I give different people widely different answers depending on their circumstances. Realistically you would want to book some time with an experienced attorney or banker to lay out your structure and get their advice. When I sit down with a client I end up breaking down their current personal assets, their investments and have them explain their future goals - along with all the details of each of those categories - before I start giving specific recommendations.

Adam Batcheller · Answer

@Scott Smith Hi Scott, I liked the advice you gave to Moses.  I too am venturing into property rentals.  I am in the process of buying a condo to rent out.  My mortgage guy is putting in as my primary residence ( I already live on an Estate as a Property manager and I am self-employed).  Would it serve me better to just open a separate checking account or a business account?

Regards,

Adam Batcheller

Separate business account or separate personal account?

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