Commingling refers to the combining or intermingling of funds that may be coming from various sources or earmarked for different purposes. As a real estate investor, commingling can help diversify your portfolio and expand your potential. As a property owner, you must clearly understand where your funds are coming from and what they’re for so that you use them appropriately.
In this post, we’ll explain what commingling is, when it’s advantageous, and when it could be illegal.
What is Commingling?
In real estate, commingling means different things to different people.
Real estate investors and everyday people
In real estate investing, a fiduciary has the authority to commingle funds for the client’s benefit. Commingled real estate funds involve collecting and combining investor assets into a single investment entity. A fund manager can purchase and manage properties directly with this pooled capital.
Be mindful that when you invest in real estate with other people, your investment may get classified as a security and require you to meet specific requirements outlined by the Securities and Exchange Commission (SEC).
To mitigate the risk of commingling, some real estate investors put their cash in mutual funds into trust accounts or dedicated escrow accounts, which a third party then manages. Others open separate bank accounts for each invested property. Either way, you should avoid mixing personal and investment funds at any cost, no matter how insignificant.
Rental property owners
Commingling happens when a landlord mixes personal income or business funds with a tenant’s security deposit check. When a tenant provides a security deposit to their landlord, the landlord becomes their fiduciary. In other words, the landlord is legally obligated to protect these funds and refrain from using them for personal expenses.
These funds should be placed into a designated fiduciary account and only touched when the tenant moves out…