accounting for newbie with owner occupied multifamily

5 Replies

Hi all, i have been lurking around bigger pockets for the last 6 months or so. This site is very helpful, especially for wishful newbies like myself. I finally closed on my first investment property a few weeks ago. It is a 3 family property i purchased using a VA loan. I will be living in one unit and renting the other two.

I have already created a new checking account for the income/expenses of the rental property. Additionally there is separate savings account for tenants security deposits (required in NH).

The two incoming rents each month are about 90% of the mortgage and will be deposited into the rental checking account.  Additionally, i plan to "pay" rent for my unit to myself to cover the rest of the mortgage and provide for maintenance/repair funds.

This leads me to my question, should i deposit my "rent" into the rental property account and then pay the mortgage from that account? or should i transfer the monthly tenant rents from the renal property account to my personal account and pay the mortgage from my personal account?

If it was entirely a rental property obviously everything would be directly into and out of the rental account, but where i will be living there i don't know the best way to do it for accounting/tax purposes?

I appreciate any advice.

Thanks

Mike, I was as the same boat as you back in 1983, bought a triplex and lived in one of the units. Since 1983, I bought and sold other rental properties.

Back then, we had a separate account for all of our rentals. We still do. The rents are paid into this separate rental account, and the mortgages paid out of it. Like you, the rents nearly covered all of the mortgage. However, for budgeting, investment purposes, we charged ourselves rent equal to one of the tenants into the rental checking account. This pays the utilities, other building expenses, and the surplus later used for investments. By paying the monthly rent, we have cash flow during tenant vacancies to pay the mortgage.

Happily, we have the same setup now, except all the mortgages are paid off. I no longer pay a monthly rent into the account, but still deposit the tenant rents. We pay taxes directly to the various the county and municipal authorities. Instead of paying rent in ourselves, we withdraw a monthly amount ourselves, which we look as a pension for us. Our municipal taxes are paid quarterly, so I don't have a steady monthly cash in and cash out.

So, rentals allows us to live rent rent with the extra cash flow as a pension. 

We're in NY, and we don't have to keep the tenant deposits separate if you own rentals below 6 units. We kept the tenant deposits in this account, but make sure we at least have account always exceed the tenant deposits for cashflow purposes.

Put your "rent" into the rental checking. Cut the checks from the rental checking and pay the mortgage. Just make sure you have the loan# on the memo.

You want to record all income and expenses for that Operating Checking. When the time comes to sell this investment or turn it into a completely rented property, you want to show the net income.

Frank,

Sounds like you are where i want to be in 30 years (or 10), except the whole NY thing i was born and raised on Long island, no way i could afford to invest there...

Simon,

Thanks for the advice, that was the original plan to pay my rent into the account just like it was a rent from a tenant then pay the mortgage from that account, but just wanted to make sure that was the right approach. Although now that brings up another question.

How about the utilities for the property? 

Water/sewer is one bill for the all 3 units - i will pay that from the operating account.

Electric/Gas is separate for each unit. Tenants pay their own electric/gas bill so i assume i should pay my own electric/gas bill for the unit i will be living in from my personal account and not the operating account?

@Michael Biener

Welcome to the Club! To answer your specific question - It doesn't matter

If you aren't working with an accountant, you should look to hire one.  A good accountant will save you more money than their fees and give you very specific advise for your exact situation and goals.  A personal filing with an income property and 1 tax-planning meeting should cost you less than $750  

It looks like you own this property under your own name and not an LLC, correct? if this is the case, you don't "need" to do anything except hold the security deposits in separate, interest bearing accounts. You are not an LLC that will need to file a return or K-1, so you don't need to maintain separate books for accounting. It's definitely good practice and can basically make you bank statements into your income statement. When it comes to tax time, you will need to be able to total up your income from the other 2 units. You will offset this with 100% expenses directly related the other 2 units, insurance, mortgage interest, taxes, a portion of common area expenses (landscaping, exterior work), a portion of any common utilities, and a portion of depreciation. I say a "portion" because you (or better, your accountant) needs to decide how to split between personal and rental expenses. Since its a 3-Fam, you could just do 1/3 of the totals, but if you live in a 1-bed and the other 2 units are 3-beds, you could argue that the personal "portion" is 1/7, or you could do it by sqft.

Hi Matt, 

Thanks for the advice.

I went with the separate account solely for the purpose of tracking the income and expenses easier. 

The thought process was that any  action on that account is somehow related to the property and would be easier to sort through at the end of the year than having to dig through my personal account with all the random transactions over the year. 

I will definitely need to find a good  accountant. I know that some things will need to be split up

between the schedule A and the E since it is an owner occupied property. Although who knows if congress actually somehow changes taxes this year...

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