All Forum Posts by: Andrew Threet

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.

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.

@Andrew Threet

1. We have our accounts at a credit union, so they don't do fees. Not business accounts. Avoid biz accts if you can. Just adds unnecessary complications with no real perks.

2. Maybe 1 time per quarter.

3. I don't really pay myself, I just put whatever is above the reserves into an online money market account that offers a higher yield interest rate. 

We use Peoples united bank for the security deposits and Windsor locks federal credit union for the reserves / operating accounts @Heather Armoogam

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?

I don't spend any of my cash flow, so it all goes into the savings account for reserves and/or the next investment. I actually hit my reserve years ago and just maintain that level at all times. Anything above my reserve limit can be spent on new investments. The best part: my wife is fully on board and lets me do what I want with it, so I never have to ask! I just put an offer in on a $425,000 property two weeks ago. I just casually mentioned it to my wife at dinner and she said, "That sounds like a good investment." I've built her trust over the years by never making a bad choice or losing money. Well, I did make one poor choice, but it still made me money!

Software is tricky. It's easy to get analysis paralysis and fail to make a decision. Or you start using one system but then see a shiny object and decide to switch. 

My advice: sit down and think about what you want the software to do for you. Marketing? Application screening? Tracking leases, contacts, and maintenance? Running reports? Make a list of what you want and try to prioritize them. It doesn't have to be complete or 100% accurate, but try to get an idea of what you want the software to do for you. Then search the different systems available and read up on them. Narrow your search down to the top 3-4 applications. Sign up for trial accounts and put them through the ringer. How easy is it to use? Does it track the information you feel is important? If you have a maintenance request, enter it in each of the applications to see which one works best. How does it handle tenant rent payments, notifications, communication, etc.

Just remember: you will never find the perfect program! Find one that does most of what you need and is easy enough to use that you'll actually stick with it. Then, start using it and stick with it. After a year or so, you'll be experienced enough to know whether you want to venture out and look for something better.

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. 

Don't make it more complicated than it is. I have 25 rentals and use two accounts. I manage almost 400 rentals with just two accounts.

You need a checking and savings account. Use the checking account to receive rent and pay expenses. If there is a security deposit payment, you transfer that to savings where it's easier to track.

The savings account is used to hold the security deposit, build/maintain the reserve fund, and to save up for your next investment. You can easily track these things with a spreadsheet or property management software.

Look for management companies who rent to students. This is a lot more common on campuses and you may find it easier to find a PM who is used to this situation there.