Rent is now coming in... where to put it?

Question

*With apologies for how basic this probably seems* I wanted to ask for general advice on where rental income should "live" in the short and long term, and make sure I'm handling things correctly. My wife and I just moved into a 3-family property a few weeks ago (our first home) and have collected our first month's rent from the two other tenants - a very good feeling.

Here's what I'm doing right now: I have both security deposits sitting in their own distinct checking accounts untouched. I opened a business account at the bank I use most often, and have a business credit card to track expenses related to the property (Home Depot on repeat). I have set up a business Checking account that I've deposited the November rental income into. I plan to pay the monthly mortgage payment and taxes from my own personal account, but the common utility bills (we pay gas for the whole home) from the business account. Is this the best way to handle things?

Other questions: Should I be paying off the business credit card (home improvements, etc) with the rental income from the business checking account rather than from my personal account? If there are large expenses right off the bat, I'll obviously need to tap all that rental income. Or should I leave the rent alone for now and just pay off the business card with our "regular" money?

Should I be setting aside a % of rental income every month into another account (like a business savings) for Cap Ex and Repairs? I know these need to be accounted for, just trying to avoid having dozens of new accounts.

I'm a ways off from this, but what about when the rental income builds up to, say, $10K or more? It seems wasteful to have it sitting in a checking account with zero interest. Can that money ever be moved, for instance, into my personal investment account and invested in something safe like a bond fund, or a high-yield savings account. I know there must be rules on mixing business income and personal accounts, but I'm not very familiar at this point.

What else should we be thinking about before year-end? I know I need to look into transferring the property into an LLC. Any other obvious things I'm overlooking?

Thanks!

Christopher Phillips · Answer

@Evan St. GeorgeThere is no reason to have so many accounts. You'll fee yourself to death. Literally, the only benefit is for tracking, which can be done with a spreadsheet or something like Quicken.But, since you already have them set up. Use one checking account for the rental property - all flows for income and expenses should go through that. Keep your personal account for yourself. Again, there is no benefit other than for tracking. If you're paying fees for all these accounts, you're receiving a negative benefit. If you're getting free checking, then it doesn't matter so much.CapEx is a tax return thing. Doesn't matter where the money sits.LLC doesn't do much either. You should have property insurance in case something happens. An LLC only protects your personal finances from creditors if you can't pay. Doesn't prevent your tenants from suing you because they slipped on an icy sidewalk.

Account Closed · Answer

@Evan St. GeorgeSet up a checking account to use only for real estate transactions. Set up a credit card to use only for real estate expenses. Everything on the credit card, I mean everything, collect them points. Use the checking acct to pay the card. This simplifies book keeping, if its on the ___ card, it’s a write off vs. going through a monthly statement and highlighting what you remember or don’t etc. Don’t intermingle in the checking account and the cc, everything that you can write off comes from the correct spot. Always.

Kenny Dahill · Answer

@Evan St. George underneath the mattress or a specific 'real estate' bank account.There was a lot to your original post, I wouldn't over think this. I prefer to have a 'real estate' checking account and 1 credit card. I only have 5 rentals so it's fairly obviously which rent amounts come from which rentals. I do have my bank account in an LLC since so are my rentals but that's not the end of the world.I prefer to keep it away from my personal banking because there are a lot more transactions on my personal than real estate. So it's quick and easy for me to look at the statement and notice any glaring issues.

Dave Rav · Answer

First --> pay yourself!! I'm so guilty of not doing this. But its so important. In addition to all the reasons the experts out there mention, you gotta take care of AND reward yourself for a job well done. Next... you mentioned what to pay off. Take stock of your debt associated with your RE investment. Separate by interest rate and date of maturity. Also look at amounts. Small balance debts can be paid off quicker, over time freeing up more of your money to pay down other things (snowball effect). However, maturity dates also impact what you need to pay off. If something has a very short term maturity, you may be forced to pay that one down sooner. HOWEVER, one thing I am finding out over the last 6 months with respect to business/commercial debt - you can typically just roll it into a new debt vehicle/loan. If you're a great credit risk and the debt isn't at 100% of its limit (ie, $1000 balance on a $1000 limit) there is usually a bank willing to consolidate or transfer your debt to them.

Dennis M. · Answer

The future doesn’t get better by hope , it gets better by plan Jim Rohn

Evan St. George · Answer

@Christopher Phillips, Thanks very much for the quick reply. I made sure the new accounts were fee-free, so I won't get hit there. More just trying to streamline things the best I can without a bunch of accounts. I see what you're saying about doing the tracking separately in a spreadsheet for a maintenance fund, etc.I'll plan to pay off the business credit card every moth with the rental income and (fingers crossed) will hopefully avoid any larger expenses on the property until I've built up some rental income reserves.

Kenny Dahill · Answer

@Evan St. George, I'm actually not allowed to respond specifically to that question, per BP rules. So I don't completely ignore your response, I have used a few different methods over the years from Venmo, Zelle and landlord software.On the bank end, I utilize 1 'real estate' bank account and I use a different bank than where I have my personal accounts. I use a local bank, I've always heard it's good to have relationships with them so I figured it would be useful to start having an account with one.

Evan St. George · Answer

@Dave Rav. @Kenny Dahill Thanks for your replies. I should clarify that this is our first home and only investment/property right now. So, thankfully, the only real debt we have is this mortgage payment and the rate we got was pretty favorable. But good to keep those options in mind. I definitely plan to keep the rental income and expenses separate from our personal funds, so it's good to hear different methods people use to do that. Kenny - what method(s) are you using to collect rents from your 5 rentals?

Evan St. George · Answer

@Dennis M. - I sure hope to have that opportunity at some point in the future!

Christopher Phillips · Answer

If they are fee free, then take advantage of them. But you'll still need a spreadsheet or Quicken to track things for rental unit reports and tax returns.