How to choose and how to
use business bank accounts for real estate investing. That’s today’s episode. Let’s dive in. Hey, everyone. Welcome to the Investing
in Real Estate show. I’m Clayton Morris. I’m Natalie Morris. And on today’s show, we’re going
to talk about how to choose and how to use business bank
accounts for real estate investing. And holy smokes, I think
we’ve set up so many stinkin’ business
bank accounts– Yes. over the past year. We have a lot. It’s super annoying. Yeah, I don’t know if you’re
watching the video on this, look behind me. Those are all checkbooks
for the various accounts that we have now,
this LLC, that LLC. So this may seem
to some people who are used to running
businesses kind of remedial, but this was
something that we had to learn along the way of
launching our own investing company. And so I thought
that it would be useful to do an
episode about that because there are a few things
you need to keep in mind. One in which– one
is that you really should not be investing in your
own name as a sole proprietor. You should be
setting up a business in which– to own
your real estate. And once you do that,
then you have to follow a whole different set of rules. It’s not like you can have your
own personal checking account and buy whatever
the heck you want, because once you have
a business account, everything that
goes through there has to be taxed and reported
under business income. So it’s completely separate. So when we first
bought properties, Clayton just said, OK, send
the rent to Clayton Morris, and here’s my address. Well, we don’t do
it that way anymore. So we had to open
business accounts. So we said, OK, well, we’re
Bank of America customers. We’ll go down and do that. We opened Bank of
America accounts, and those are really high
fee accounts for business. It’s not like,
oh, they just have free checking for business. So that’s why I wanted
to talk about this is– how to use them but
also how to choose them. OK, so what should you look
for when you’re setting up– first of all, why
is it important? Let’s go to high level first. Why is it important to set
up business checking accounts or savings accounts
for your LLC? Well, how are you going to
collect your rents, right? When you have a business,
the purpose of that business is to make money. If you don’t make any money– I mean, you can have a
business that has a loss. But if you have a
business that reports a loss for more than two years,
the IRS can call it a hobby, say you’re not really
trying to make money here. You’re just trying to
get around tax laws, and you can lose
your business status. So eventually you want your
business to be a money maker. OK, so where does that money go? You can’t take the
business– let’s come up with a fictitious
LLC for this show. We’ll call Cloud, LLC. Cloud, LLC. OK, so now you have Cloud, LLC,
and you’ve bought a real estate investment and you’re
going to get rent for that. So you get a check for $500. You cannot then go put that $500
into your own checking account because– Your own personal
checking account. Into your own personal
checking account, you’ll get in deep
doo-doo for that. Why? Because the rules under
which the IRS is going to tax your business are
completely separate, and to be honest, more
favorable than the rules under which the IRS will
tax you as a person. So I mean, obviously
since the taxes– the money that goes
through the business is taxed with so many
more favorable rules, you would want to use
that money, right? So you think, well, then I’m
going to buy my lunch out of the business account. I’m going to buy a pair
of shoes out of it. You can’t do that, right? You have to buy your lunch
and your pair of shoes with money that’s been
taxed appropriately. You can’t use the money
that’s taxed more favorably. What is made and spent
inside the business account has to be business dollars. So we had some family members
even that we were just kind of mentioning how their
investments were going. And they’re like, well,
yeah, I pay my bills out of that rental income. I was like, Whoa, whoa, you
can’t pay your electricity bill out of your rent that’s just
in that checking account. You have to pay yourself
in order to use that money. So you have to pay yourself
as the owner, as owner pay, right– Right. –from your business to
your personal account? And that money then is taxed. Then you can use it. Right, and that money
is taxed as a draw. So yes, you want to be able to
enjoy this money and use it, right, but it has to
be done appropriately. And since you have
decided to purchase inside of some kind of
business entity, you have to use those bank
accounts appropriately. So if we want money
out of Cloud, LLC, we have to write
ourselves a check or transfer it over into our
own personal Bank of America or whatever checking account,
and then we keep track of that and it’s taxed as a
draw to ourselves. OK, so you cannot use it for
any personal whatever, right? Like, it’s not– unless your
business is selling shoes, you can’t buy shoes or unless– I mean, I guess if you were
working on flooded basements and you needed Wellies,
I guess that would work. Wellies, is that
a name of a shoe? Hello. It’s a rain boot. OK. Wait a minute. Are you more impressed
with me as your husband that I don’t know a fashiony
rain boot, or would you– come on. It’s just like what
they called it back in Old English, hound
hunting or whatever. It’s Wellies, right. So you’ve bought me them
for Christmas before, those green Wellies I have. I love those boots. Anyway– Hunters. Right, but that’s sort of– Hunter is the brand
name, is the proper noun, but Wellies is the noun. Gotcha, OK. So anyway– Glad we solved that. So that is the
circumstance under which you can buy shoes
inside your LLC, but otherwise no personal
use of this money, right. And so we’ve talked
about many times how we try and make as
many of our family expenses business expenses so that we are
paying for things we otherwise would pay for with
business money, for instance, our cell phone
bills, our broadband expense, our– I don’t know what else. I don’t want to put
too much conjecture. But you’re trying– Or a computer, buy
a computer, right? Right, yeah, an iPad
maybe, you do want an iPad but you use it for business,
that’s a business expense. So we are trying to use this
money for our personal gain but not because we
want to break the law but because we want
to do it legitimately. So sometimes Clayton will have– he’ll meet an
investor– he likes this place– this coffee
place out in Morristown, and he goes to
this coffee place. He doesn’t otherwise go
to this coffee place, only to meet
investors and partners and that kind of thing. So he’ll use his
business credit card. When he does that, he
has to keep track of it so that the IRS doesn’t
say, well, you’re just going to coffee
using business money. You can’t do that. So he has to then
give me the receipts and I take a picture of them. I use Neat Receipts, and I write
down the name of the investor or what the purpose of
that meeting or something so that if the IRS said, this
was a business deduction that shouldn’t have been, I can
show them this picture, and they’ll see my notes. So clearly that was
a business expense because I wouldn’t have gone
through all of that, right, in order to– I can’t do that retroactively. I would have kept that receipt
and had that written on it. Right, like tomorrow
I’m meeting an investor who’s done huge projects. He wants me to speak, do
some public speaking at some different events for his group. And so I’m meeting
for lunch tomorrow. I plan to pay for it. I will use during that
lunch to kind of discuss strategy going forward over
the next few years with him. That credit card– our
business credit card because I plan to pay for this,
and this is a business expense. And so I wouldn’t be using
my personal card for that. Right. And that’s not to say
that sometimes Clayton doesn’t use the wrong card. And so I have to– Thanks. Right. I mean, we use Capital One
Bank, and I’ll explain why. We have no relationship
with any bank to tell you which
ones to use, and I’ll help you choose your bank
later on in this episode. But they look alike. There are two Capital One
cards and they’re both blue, and so sometimes he uses one
and I see it in the statement. I was like, what’s this for? And he said, oh, I just was
having lunch or whatever. And so I transfer
that money over, and I write to our
accountant and I let them know that that
was a mistake because I don’t want little things like
that to trigger an audit. We try really hard to be
as honest as possible. And it’s not about–
like Tom Wheelwright says in his great book
Tax Free Wealth, it’s not about
breaking the rules. It’s about following the rules
to the best of your advantage. So we try really hard not
to bend or break the rules. So credit cards can be a
part of this discussion about bank accounts. At the end of the day,
they are bank accounts. So maybe since we were
talking about credit cards, before we get into the
business checking account, is there a particular
type of credit card? I mean, we use
Capital One, but is– we researched them extensively
to find the right ones for our business. Why did we pick these? Yeah, we decided– because
there are really no– as far as I know– actually I’m going to say
this, and I’m not sure that it’s true. But I’m pretty sure
it’s true that there’s no rule against using
the points on a card for a non-business purpose. I don’t think that that’s– have you ever heard of
something like that? What’s that? Like you use your
business card and you get so many rewards
mileage, you essentially have purchased that as– from the business. So then if– I don’t know the answer to that. –you then go and
book personal travel– I think that that’s
non-regulated. I don’t know, so don’t– Right, because it’s
not actual cash, right? It’s– But you’re using– It’s like a prize. But it is like a currency. You’re using a business
currency for a personal– Let’s ask Tom Wheelwright. Since we are not tax experts,
We are not financial advisors, let’s ask our advisors so
we can get correct answers. But we did– actually we chose
Capital One because we wanted to use their points for
travel, and that was something that we decided in our
family was important to us. But they actually also
have some really great cash back products that
I’ve seen recently. It’s like 1.5 points per– I’m not exactly sure, but I
was looking at it recently. So if you want cash
back on your purchases, that’s another way to go. They have– you can
spend at specific stores and get discounts. If you like to
travel with Disney, you get a Disney credit card. You just choose based on
whatever rewards you want, whatever your values are. Now, because we liked the
options with Capital One, we chose a card
with an annual fee, and it also had a
lower percentage rate. I’m fine with that because
of the trade-off there. But if you don’t want to pay an
annual fee, you don’t have to. You can usually– usually
the higher the annual fee, the lower the interest
rate you will get and the more points per
dollar spent you will get. So if you want a
no-fee card, you might get one point
per dollar spent, but because we pay
something like $60 a month, we get two points
per dollar spent. And that really worked out. It makes sense for us. Well, and think about
traveling to go visit– let’s say you own a property
in Florida, for instance, and you want to take the family
down and have that meeting and go check out
your rental property or just go check
out the neighborhood or do some additional
research or something like– use your business credit
card for that trip, right, and then of course, talk
with your accountant about how to take
advantage of the fact that this is a
business trip, right, and how you can
then break that out and seek the advice of your
accountant on how to do that. But that’s why– Yeah, Tom Wheelwright
has a whole chapter in his book about traveling for
business and making sure that– I mean, he’s very
specific about it. He can’t just bring
his mother-in-law and that counts, if his
mother-in-law is not a part of the business. And you want to
be careful and you want to document
the fact that you do have, in fact,
business purpose there and what meetings, who you
talk to, where you went, that kind of thing. That’s usually not
too hard to do. Again, it’s using this
money to your advantage, not breaking the rules. OK, good so we got
the credit cards, and so we like
those– the Spark card and the Capital One Venture
card for personal stuff and then the Spark
card for our business. It’s been great. I think we actually–
yeah, well, we’ll get some
answers specifically around the idea of how
to use those points. And if you have to use
those for business, my gut says no, but
again, we’re not experts. I would be so surprised
if the IRS really took a hard use at points. But again, once you get
to really big fish level, then that would mean
something, and maybe the IRS does want to get
its hooks in that. I’ve done no research on this. So please don’t listen to us. This is something that I’m
just wondering about aloud. Me, too. So now let’s talk about
the actual physical bank accounts from your local
bank or national banks, the ones that you’re
actually going to get the checkbooks in the
mail, the debit cards, and all of those things. We went down– as you mentioned,
we had some higher fee accounts with Bank of America, right? Yeah. And then we switched over
to one of our local banks. And what was the
impetus for that? How did we do it wrong? And how did we start
to do it right? OK, I’m going to
admit to something that is kind of embarrassing. So we went down
to Bank of America and we said, we would like
a business checking account. So you have to show them
your EIN number, which you’ll get from the IRS, and your
articles of incorporation that you filed with the state. And that’s how they know
to report the money that comes through that account. OK, good. So you get a credit card–
or you get a checking account number and a routing number. You’re good to go. Now you can accept
payment into this account. Well, Bank of America didn’t
have any free business accounts for us. So their rules were either
that you would pay– I want to say it was
either $35 a month or it would be free if you
used the ATM card every month for up to $200 in purchases. And so they said, so you
can go to the grocery store or whatever. And I was like great,
and so I was doing that. And then I realized like,
wait, but groceries are not a business expense. I’m just doing that in
order to accrue $200. So that was inappropriate
use of those funds. I didn’t know any better. And then also I was trying to– we started to implement this
profit first system, which we’ve talked about
several times on the show. And so I was trying to have
a profit savings account. So just– because on Bank
of America I can see all of the accounts that we
own, I would take money from the business account
and then put it into– we just had an extra
savings account that came with our
personal checking account. Well, that’s also illegal. You can’t do that. So I mean, I just was
like OK, I’ll do that. I think I did it for two weeks. And then I continued
to do my research. I was like, whoa,
that’s not right. So I put all that money back,
and I stopped using that for– and I paid myself
back, and I made sure our accountant
knew why I was putting that money for
the groceries back in. But then I had a
problem because we don’t need an ATM card for a
real estate investment company. So I said, well, how
am I going to use this? I just go and get $200 and
then put it right back in? That’s dumb. So I started to look for
no-fee business accounts, and it actually was easier
to find than I thought. You can search Bankrate.com
and see if any of the big banks have anything that you like. But more often than
not, you’re going to find some really great
options with your local bank. Yeah, local banks we
talked about it before. We, of course,
wrote a whole book around the idea of using
a HELOC, home equity line of credit, to pay off
your mortgage in five years. You can find that
on Amazon, but we talk about– there’s a whole
chapter that we talk about go local and talk
to your local banks because very often they’re
going to be able to get you great deals. They’re going to be
able to bring you things as a local
bank that you probably can’t get from some of
the big national banks. Right. Maybe some better rates, maybe
even better customer service if you actually like to
talk to a human being. We’re friends with our banker,
Dennis and the whole team over there. So you get that
personal touch as well. Right, so I didn’t
want there to be a fee if we didn’t have
a daily balance, an average daily
balance of so much. And usually those fees go away
when you keep $15,000 in there. Well, for rental
real estate, you don’t just accrue $15,000
in your checking account and leave it there. Then you buy something else. You move it into
a savings account. You save it for taxes. That’s pretty rare that you
just keep $15,000 hanging out in your LLC checking account. At least we don’t
do it that way. So I didn’t want to just
keep that money there in a no-interest-bearing
account just to make sure I wasn’t
paying $35 a month. But I also didn’t want to
pay $35 a month because I knew that there were options. So I went looking for a
bank that had no annual– no fee business accounts
and also no daily balance requirements. My sister did the same thing. She just purchased
a property in Idaho, and she found a credit
union that opened up a business account for her. And she said the same
thing, just no fee account, no minimum balance. So what is the difference
between a business account and a personal account? What is the distinction? And why do we want to set
up a business account? We already did this, we were
talking about this earlier in the show. Well, no, but I mean, like– What do you mean by that? Well, I mean like, OK, in
the structuring at the bank, they call it a business account. There’s usually–
they have four tiers. They’ll say this is the
business platinum edition. This is the business
flying eagle edition. They always have
all these random– Well, they’ll give you some kind
of different level of service. So for instance,
for Bank of America, if you pay a certain
amount per year, then you don’t have to
keep the minimum balance. But if you do keep that minimum
balance– and a lot of it has to do with the
bells and whistles of transferring your
money in and out. Now, we use this small
bank for just our LLCs that own properties, and it’s no
fee, it’s no minimum balance. It’s great. But they don’t have a really
great service for wiring money. They can accept wires fine. Anyone can accept wires. But to actually send a wire,
I have to go to the bank. And when we purchase a
real estate property, we need to send a wire, and
we acquire pretty quickly. So I was down
there all the time, just like literally
writing out how to– this money to send a wire. And I was like, this
is not going to do. I don’t want to have to go
there, and so I was like, can I do it on my phone? They’re like no. So I don’t want to do that. So what I ended up
doing is opening– I found a product
through Capital One. They had a business
bank account with no fee and no minimum balance– and actually I think there is
a minimum balance in this one. But for the purposes
of this account, I’m able to hit the
minimum balance, but they gave us five
free wires a month. And that’s incoming
and outgoing, and that was important to me. Now, if you accept your
rent by an ACH or a wire, then you want to ask how
much does that cost me? Because if your bank charges
you $30 for a wire of $500, you don’t want that. That’s a percentage of
your profits, right? That’s like adding
a little bit more onto the property
management fee– Exactly, right. –or taxes. You have to figure
that into your ROI. So if you see a $500 deposit and
then right under that wire fee $30, no, that’s an
unacceptable– even though that’s a
business expense, you’ve got nothing for it. It would have been
better to just deposit that check in the ATM. So that’s why we have– for that account we use Capital
One because of the free wires. And that ended up
being great for us. So those are things
you want to look for. OK, good. So we’ve set up the
business accounts. Are there any other
things we need to know about these
types of accounts? You mentioned profit first. How many accounts
per property or LLC? How many accounts per
LLC are we opening up? About four or five? I don’t do it that way. But that’s– we can talk more
about profit first another time. But each LLC does have
its own bank account, but because we have this small
local bank for the no-fee business checking accounts
and then we also still have– we do have a Bank of
America business account, but it’s for something
completely different. And then we also have
a Capital One account. I can’t really transfer money
in between those accounts, and you’re not
supposed to anyway. If I want to
transfer that money, I have to give it
to myself as a draw and then put it in
a different account, and that is taxed
very specifically. And we have to keep
records of that. You can’t just
move money around. I don’t know, shady. Right. You can’t just do that. And because we have a lot of our
investments in this small bank, this small bank doesn’t
have a very robust website. So I can’t just pay myself
with a wire transfer. I have to write myself a
check from those small LLCs– that’s all those
checkbooks behind me– and then deposit it into
our personal account. So that’s kind of a pain. As we continue to build
our real estate portfolio and have more and
more properties, I continue to remove myself
from the accounting of it because I want to make
sure it’s done properly. And we have a great team
that does that for us, who was recommended by ProVision. And so sometimes they’ll
say, what was this transfer? What was this thing? Because as great a
records keeper I am, they are even
better, and they know how to code these things
appropriately and make sure we are taxed
appropriately and that we don’t miss any deductions,
all of that stuff. But what no one can
really do for me is to keep these checkbooks and
pay ourselves when we need to and know which thing
is at which bank. I mean, I have a spreadsheet I
recently shared with Clayton. I was like, here is a list
of all of our accounts that if God forbid I’m hit
by a falling meteor tomorrow, then you know
where our money is. Now, as far as using the debit
card versus the credit card, is there a benefit or is one
bad for your business to use? So, for instance,
oh, I’m gonna go out to have coffee with this
individual from the business, right, as a business
expense, is it wrong for me to use that debit card
that’s going to come directly out of that checking
account to pay for that in that meeting
or that business expense? Well, not necessarily, but a
debit card is much less secure. They don’t have the same
kind of fraud alerts– And protection. –as a credit card
and protection. And if you buy something, say,
for one of your investments that’s faulty, the credit card
will be on your side a lot more than the debit card will be. Also, you’re losing
out on the opportunity to accrue points if
that is your goal. But also a business
account doesn’t always offer you an ATM. That sometimes is a higher fee. They’ll say, oh, you
want an ATM card? We’re going to charge you $100
because the small banks do charge you for
these little things because you’re otherwise
paying a no-fee account. So for most of our
checking accounts that we have that are
business accounts, we don’t have ATM
cards for them. We just have a checkbook
and an account number because I don’t really need it. I could get one if I wanted to
or I could just go to the bank and ask for $100
dollars out of that LLC, but we don’t carry
those debit cards. So bottom line, is
there any other bits of wisdom that we need for
using business bank accounts for real estate investing? Yeah, one more thing. One more thing. So the last thing that I also
have learned the hard way is that because we’re using now
this smaller bank, they don’t– there are fees
for actual checks, which I know some of you are
like who writes a check anyway. But I do need checks either
to transfer money to ourselves or sometimes to pay
a tax bill if it’s in a smaller municipality that
doesn’t accept taxes online or I don’t know. There tends to be
random reasons that we need checks, but this free,
no-fee, no-balance business checking account, it
costs $50 to order checks, and you get one or two
books, like almost nothing. So that’s a lot of
money to pay for checks. So what I ended up doing
is using either Vistaprint or Costco and printing
my own checks, and I pay pennies for a check. Yeah, because they
don’t need to be fancy. I mean, I remember
the first time I ever got my first checkbook. You’re presented with a
whole host of options. Do you– is this– do you want kittens,
do you want Star Wars– Star Wars– –checks, you’re going
to pay a premium. Now they have Minions. Yeah, Minions. Who wants to pay that
additional– no, no. Give me the base grade, the
cheapest checks possible. It’s going right into a bank. Right. No one’s impressing
anybody with a picture of a kitten on your check. Also, I was ordering
checks recently for our personal
account, and I was like– they had some that
I thought were kind of cute that were from– they were Monopoly themed,
the Monopoly board. But then I thought about
writing a check for something at our school and giving
it to our class parent, and I was like, I’d
be really embarrassed to have this really fancy
like stylized check. So yes, you don’t want to pay–
this is not the place to really express yourself personally. That’s my opinion. Maybe some people
really think that that’s a personal expression, and
I don’t judge you for that. Buy a fancy hat instead. Yeah, yeah. So I would not pay
a premium for that, but Costco checks is great. I mean, it takes a
little while to ship. But you can really
go cheap on that. That’s one thing in life
that I feel like going cheap is totally acceptable. Wal-Mart does it. So yeah, shop around for checks. There’s no reason
to pay for that. Well, there you go. Some great tips
on how to set up, how to use your
business checking accounts for real
estate investing and why you should do
it in the first place. And then yeah, we’ll
do a whole episode on the profit first structuring
of these accounts, too. That would be another
good follow-up episode. If you haven’t
already checked out, we recently had Mike
Michalowicz on our show as– we had Mike Michalowicz on
Episode 169 of the Investing in Real Estate show, so
you can check that out on iTunes as a podcast. He was great. He walked through how
to set up profit first. It’s a game changer. You should definitely read his
book if you haven’t, but then also how to incorporate it
into your real estate investing is really, really important. So you can take
profits first and then be able to make sure that all
of your taxes are taken care of. And all of those structures are
so important for your business. So any final parting thoughts? No. No. I’m good. She’s shaking her head. I had lots to say today. I feel like it was
a big soliloquy. That was good. I just let you
roll because she’s the one that handles all these
spreadsheets and bank accounts. So I let you handle it. There you go. That’s the Investing
in Real Estate show for this week, everyone. We’ll see you next time. We’ve got a great episode
lined up for you tomorrow and what is going on
with the current market. You want to check that out. The audio version of the podcast
will be out with Brian Kline. He’s a writer. He follows the trends
in real estate. So check it out. If you get a chance, please
download tomorrow’s episode of what is going on
with the current market in the real estate world,
what’s happening out there. So we’ll check in with him. That’ll be great. Till next time,
everyone, and we’ll see you back here on another
episode of the Investing in Real Estate show. Go out there, take action, and
become a real estate investor. We’ll see you next
time, everyone.