Good Morning,
Newbie Here !!!
We have rented our 1st property in a 2 flat we purched and rehabbed. We collect the security deposit and 1st mth. rent tomorrow. Question is, and I’m sorry if this has been asked and answered before, do you set up a seperate bank acct. for each property? Could the tenants take the rent to the bank where we have an acct. set up just for this property knowing that it would need to be deposited on a certain date or they will be late? Should it go into a personal acct.? I have much of Dave’s info but have not gotten through it all as yet. Thanks for the input…
I keep my personal account separate from my business account. Therefore, I deposit the rents in a business account. I have several rentals (usually 10-12) in each LLC and each LLC has a checkbook. Your state law may require the security deposits to be kept in a separate account, so be sure to learn the law in your state.
Good Luck,
Mike
Mike,
Thank You.
Shaughno
Sounds like you are operating this property in your own name without a business entity – as a sole proprietor.
As long as you are a sole proprietor, there is no problem if you use your personal checking account as your rental checking account. If you get to the point where you decide to establish a business entity to operate your rental activity, then you will need a business checking account that is separate and independent of your personal account. Why not just start off with a separate rental account now?
Many state’s landlord tenant law requires security deposits to be maintained in a separate “escrow” account. Some may even require you to accrue interest on the deposited funds for the tenant’s benefit. The new accounts specialist at your bank will know exactly what you need and will be happy to assist you.
As Mike said, you need to know your state’s landlord-tenant law. It makes good business sense to segregate security deposits from all your other accounts, regardless of your state’s requirements. If you acquire more rentals, you can use one account for all your security deposits as long as you keep the bookkeeping straight.
Good Morning,
Currently we do have this property as sole proprietors. Yesterday the banker said to have this property established as an LLC. Which is something we had intended to do but didn’t think it was going to rent so quickly. He also mentioned that it was not necessary to seperate the security deposit from the rental income.
Dave T, why do you suggest the seperation of the security and rental dollars? As I mentioned we are newbies and just tring to gather as much info as possible and then decide which route to take.
The banker also said that the cost for EACH LLC was $612.50. Is this a reasonable rate? Also, I had heard (from Dave?) that if the property is 4 units or less it should go into a trust rather than an LLC…Over 4 units it is established as an LLC. Has anyone else heard this and what would be the reason?
Thanks again for all your help.
Shaughno
Shaughno,
You have to wonder whether the banker has an ulterior motive for pushing you toward an LLC. Could it be that the bank wants to open a business checking account for your LLC and collect the higher bank fees charged for a business account?
There are a lot of successful landlords who don’t use an LLC to hold their rental property. Perhaps you are thinking that you need the LLC as a hedge against a lawsuit. If you follow BLL’s posts on the LLC and asset protection, you will see that the LLC provides little asset protection when you are managing your rental property yourself.
A revocable trust is used for estate planning and probate avoidance and is useful regardless of how many properties you may own.
Operating your rental activity in a professional, business-like manner, making timely repairs when needed, and treating all your tenants and potential tenants fairly will go a long way toward denying anyone grounds to sue you. In additon, if you purchase a large liability rider with your hazard insurance policy, you will probably be fine.
I seriously doubt that the banker is qualified to give you legal or tax advice. Whether you can benefit from a business entity depends upon many factors including your net worth, estate plan, business continuity plan, federal estate taxes, your retirement plans and retirement savings, and your ability to use certain business tax deductions. The decision to form a business entity and the type of entity you need should be made in consultation with your tax advisor, your estate planner, your CPA, and your attorney – with all in the room at the same time.
Your profile does not tell us your city and state, so I have no way to rebut your banker’s claim that you don’t need to “escrow” security deposits. I can only tell you that many state’s landlord-tenant laws require a separate account for your security deposits. Why not call two or three professional property management companies in your area and ask them if they “escrow” security deposits and whether it is required by law.
Regardless of whether your state law requires you to maintain a separate account for secruity deposits, I think it is still a good business practice to do so. My thinking is that the security deposits are not your money, it is your tenant’s money. You collect a deposit as a hedge against the cost to repair damage due to tenant abuse. If there are no damages, then you must refund the deposit in full. If you comingle the security deposits with your personal or rental operating funds, then you will most likely spend the money. You have a better chance of not touching the money if it is in a separate bank account.
Also, I had heard (from Dave?) that if the property is 4 units or less it should go into a trust rather than an LLC....Over 4 units it is established as an LLC.
I don’t know where you heard that (I’m sure that it wasn’t from Dave), but it is nonsense. A land trust can provide some privacy, but does not provide asset protection. A LLC does provide asset protection.
We’ve had the discussion about the virtues of LLCs before and I disagree that LLCs are of little value for asset protection. Quite the contrary, I believe that they are an essential part of a comprehensive asset protection program. I have been sued once and had two other tenants hire those scumbag TV contingency lawyers to try to sue me. I believe that the asset protection program that I use was absolutely critical in terminating (winning) the first lawsuit and having the other two lawsuits dropped before they even began.
I also totally disagree that “operating your rental activity in a professional, business-like manner, making timely repairs when needed, and treating all your tenants and potential tenants fairly will go a long way toward denying anyone grounds to sue you.” As I said, I have been sued once and had two other tenants and their scumbag contingency lawyers try to sue me and NOT ONE OF THESE WAS A LEGITIMATE CLAIM. One was a tenant that was being evicted who faked an accident on the property. One was a tenant whose druggie son apparently was hiding drugs in the water meter cover; left the cover off; and his mother fell in the water meter hole. The third was a woman who piled a bunch of crap at the top of her stairs and wanted to sue me when she tripped over it and fell down the stairs. I did absolutely nothing wrong in any of these instances - yet they resulted in one actual lawsuit and two other extortion attempts by scumbag contingency lawyers!!!
In addition, I don’t know a single landlord that has a significant portfolio that hasn’t been sued. Tenants, especially low income tenants, often have little going for them. They like nothing better than to play the landlord lottery (suing the landlord)!
Good Luck,
Mike
Mike,
I think you make my point. You had an LLC and still got sued by your tenants. The LLC did not prevent the lawsuit, and the LLC’s asset protection would not have done anything to prevent your LLC’s assets from being seized to settle the award if the lawsuit had been successful.
I suspect that your lawsuits were successfully defended or withdrawn because the plaintiffs had no grounds to uphold their claim. You did not commit any negligent act that gave the tenants grounds to sustain a lawsuit. I assume you had liability insurance and your insurance company provided the attorney and paid the costs to defend you.
I bet you would have achieved the same outcome by operating your rental business in a professional manner and by purchasing adequate liability insurance.
I agree with you that a properly structured business entity has some value in limiting liability once the investor has "significant’ assets to protect. In Shaughno’s case, he has just a single property that he manages himself. I still maintain that if Shaughno operates his rental responsibly and has adequate liability insurance, an LLC will not add any value.
Dave T and Property Manager,
Thanks for the input (again)!
Much to consider…
Shaugho
Or you can just carry a shotgun while you do maintenance on your property. I think they will get the point.
Does the Insurance Company that provides the insurance for the buildings also provide the Liability insurance? Can you shop around for that separately?
It is indeed good to separate your business account to your personal account… in that way you dont get confused with finances… i learned this the very hard way.
I like to store my collected rents in the pocket opposite my gun.
lol John, I hope that collected rent’s total is more than the cost of your gun :beer
[quote author=Dave T link=topic=38686.msg185954#msg185954 date=1222177929]
As long as you are a sole proprietor, there is no problem if you use your personal checking account as your rental checking account. If you get to the point where you decide to establish a business entity to operate your rental activity, then you will need a business checking account that is separate and independent of your personal account. Why not just start off with a separate rental account now?
We have opened up a checking acct. w/ a savings attached at no cost to us. My husband had an idea that we would have our tenants deposit their rent checks directly into the savings acct. We would then not have to go around and collect the $ every month. The banker thought this might work as well. They would not have access to withdraw money just deposit it. It would have to be deposited by a certain date of the month or they would be late. All we would have to do is look the acct. up on line to see if the deposit was made in a timely manner. Our hesitation is that there may be a way for anyone to gain access to this savings acct. I know that fake I.D.'s can be purchased on line and perhaps this is all they would need to show to a teller to withdraw money from a savings acct. Has anyone tried this or has the thought been discussed?
Thanks again, our 2 flat is now rented. Hopefully, the next project will do as well.
Shaughno
My recommendation is to open up a PO box for them to send the checks to (this is if you don’t want to or can’t go around and collect rents in person). This keeps them completely detached from your checking acct so you don’t have to worry about the scenario you posted. We base our late fees off the postmark date on the rent payments. If it’s postmarked before our deadline, good to go. If it’s late, the residents know they’ll be paying a late fee that is explicitly stated in the lease. We’ve not had a problem with this yet. Postmarks don’t lie. It’s their responsibility to get the payment to the post office on time. Remember to be firm, but fair. Set a standard and stick to it so you don’t get the sob story and have people walking on you.
Justin 0419,
Thank You, this sounds like a good idea. We’ll give it a try.
Shaughno
Remember, when it comes to audits, banks are your worst enemy