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 and gets their security deposit back, minus the cost of cleaning and repairs.
Agents and brokers
Commingling occurs when they mix personal funds with the funds of a client. Even though this is legal in some circumstances, many real estate professionals believe you should avoid commingling at all costs. If an agent or broker is illegally commingling funds, they risk getting their license revoked or suspended.
If you’re investing in real estate, you’re probably already commingling without even knowing it! Here are a few common commingled investments:
- Real Estate Investment Trusts (REITS): REITS finance, own, or operate real estate assets that produce income. They’re often physical assets, such as office buildings, apartment complexes, storage facilities, and warehouses, but they can also offer financing to assist others in acquiring income-generating real estate.
- Mutual Funds: Mutual funds are “mutually” purchased stocks, bonds, and other investments. In real estate, mutual funds often invest in REITs and real estate operating organizations.
- Crowdfunding: Real estate crowdfunding allows you to invest money with others online to purchase a real estate asset (or a portion of it) as a group. Crowdfunded investments can give you access to otherwise exclusive, private investments that aren’t offered to the general public but can deliver high returns (e.g., high rises).
Advantages of Commingling
Legal commingling comes with fantastic advantages for fund investors and everyday people. Commingled investments let you:
- Increase your passive income stream
- Diversify your portfolio
- Acquire properties with higher returns you can’t afford to purchase alone
- Partner with others to gain access to exclusive, private investment opportunities
When is Commingling Illegal?
Most illegal commingling occurs when you fix your personal assets with a client or tenant’s business assets. If you’re working with an investment manager, they have a fiduciary responsibility to follow certain standards and specifications when managing your assets. Failure to do so violates the contract they have made with you.
Rental property owners also have to be mindful of illegal commingling. For example, depositing a tenant’s security deposit in your personal account is illegal. Security deposits should be placed into a designated trust account and only touched when you’re refunding that deposit.
If you’re ever concerned about commingling, refer to the BiggerPockets forums. BiggerPockets exists to help ordinary people build wealth through real estate, which includes any questions you may have on your journey.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.