How to Setup Bank Accounts

Question

Are there any CPA's or experienced investors on here that can help me out with how to setup my bank accounts or offer advice on how you setup your systems for your real estate investments?

I'm looking to close on my first house hack within the month so I'm trying to open a new business account for this. This is what my plan is so far. I was going to use a savings account to hold the security deposits, and a checking to collect rent and charge all other expenses.

But when it comes to reserves, should I open up another checkings/savings to hold these funds? Or should I just keep it all in the same checking? But if I keep my reserves in my checking how do I keep track of and separate what I'm setting aside for reserves and what is my monthly cash flow? Should I take out my cash flow/profits and put it into another account?

I know this is a loaded question, but I feel this is a crucial part in running a successful real estate business and I want to set up good habits from the start. Any advice on how to handle my bank accounts would be much appreciated!

Nathan Gesner · Answer

Building a reserve is very personal and it's difficult to develop a hard-and-fast rule. Examples:

1. 65-year-old heart surgeon with no kids, no debt. He makes $300,000 a year, a credit limit of $50,000, and he owns ten rentals that generate $10,000 a month. He sets the cash flow aside to save up for his next investment and currently has a balance of $60,000. If one of his rentals needs a new roof, he can absorb that cost without batting an eye.

2. Husband / wife with one investment that generates $600 per month. They have $3,500 in savings. If the roof failed on their rental, they would have to borrow money to make ends meet and then they would be paying on that loan for a year or more.

The point is, we can't create a rule for how much to reserve because there are too many factors at play. Some things to consider:

• Your regular monthly income
• How many rentals you have (the more you have, the more wide-spread your pain)
• Monthly cash flow
• Personal budget
• Savings
• Lines of credit
• Other financial resources

If you have a strong monthly income, good financial discipline, and available credit, then a reserve may not be necessary. If you have one rental, you may want to save six months of rent income to cover repairs or vacancies. If you have 50 rentals, you may only need 1 month of rent per unit to create a large pile of cash that covers all your properties.

Personally, I have strong income, no debt (except investment mortgages), a good line of credit, and 25 rentals with strong cash flow. I can absorb a lot more than a beginner may be able to.

My suggestion is for you to sit down for an hour (include your spouse or partner, if you have one) and run through some scenarios to see what you can absorb. What happens if a roof fails? What if the tenant doesn't pay rent for a month, leaves the place with $6,000 in damages, and it sits vacant for another month while we renovate? What if the furnace fails on two units? What if the market slows and I have to drop my rents 20% just to keep them full?

David Richter · Answer

Hi @Andrew Threet,I highly recommend reading Profit First by Mike Miichakowicz. Without any financial literacy, it tells you how to manage the finances of your properties and business.Reading this book will literally add zeros to your bank account if you start out with this system.

Filipe Pereira · Answer

I'm a fan of keeping things simple and easy to understand @Andrew Threet. I have one checking account and one savings account. The savings account is for any "permanent" money - reserves, cashflow being saved for the next investment, etc. The checking account is for any funds that are transient. Think of it like money comes in and out of this account. Rents come in, mortgage costs go out, reserve funds get transferred to the savings account, etc. The checking account gets brought down to a $0 balance at the end of each month. The money is either used up in expenses, or transferred over to the savings.

As for security deposits, I have found this to be state specific. For example, in Connecticut, we are required to hold the money in an interest bearing escrow account in the name of the tenant. It's pretty easy to set up and we've had good results using a local bank out here. Credit unions do not offer them unfortunately. Check your state laws to see if this is a requirement for you.

Andrew Threet · Answer

Thanks Filipe, I'm gonna have to take a look into credit unions and what makes them different. I'm still pretty new to this stuff so not sure what differentiates credit unions from traditional banking haha

Heather Armoogam · Answer

@Filipe Pereira, great!! Thanks for responding.

Zachary Ray · Answer

@Nathan G. is right, you don't want to over complicate it and not know where any funds are. Some management companies use an operating fund and a security deposit account. Best of luck to you.

Lynnette E. · Answer

You have to look it up separately for each state, but could just google something like 'rental security deposit STATE' and then you will see all the laws for that state.  Some have limitations on how much you can hold, some require interest bearing accounts and you must turn over the interest, etc.

Andrew Threet · Answer

Thanks for the heads up Lynette, is there a certain site that lists these things out? Or I'll just have to look it up and find it?

Lynnette E. · Answer

Make sure you know exactly how the state laws for the location of the property require the security deposit to be handled.

In some state each security deposit must be in a separate account.  In other states all security deposits can be co-mingled in one account, but nothing but security deposits can go into the account.  In others you can co-mingle the security deposits with other money.

Based on the state rules for how you handle the security deposits will tell you how many accounts you need.

Andrew Threet · Answer

Thanks for the rec David! Going to add this to my priority reading list.

How to Setup Bank Accounts

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