Keeping track of RE Finances & Taxes?

Question

I am reading the book "The House Hacking Strategy"

Craig mentions to keep a separate (bank) account for real estate, because it will make it easier when doing taxes.

Can this be an additional savings account? Or does it need to be an additional checking and an additional savings account?

Daniel Hyman · Answer

Our firm usually recommends a separate bank account.

The tricky about the house hack is that you will invariably have transactions that include both business and personal transactions. For example, mortgage interest. Do you pay from the business account? Or the personal account? There are multiple ways to structure the transactions and the banking activity.

Ultimately, as you scale up, you'll want to get in to the habit of treating your portfolio as a business, which means a separate bank account.

JD Martin · Answer

Depends on your state but most require you hold deposits separate from your other funds, so you would need at least one additional account to do that (unless you don't want to take a deposit, not recommended). You could just deposit rent money and pay expenses out of your normal bank account if you are just going to do a live-in rental property, but if you plan on any kind of expansion you would want to separate that money in the future so you might as well get in the habit now. Besides, unless you are really good with spreadsheets, it's easier to see if/how much money this endeavor is making if you segregate the funds.

JD Martin · Answer

Certainly. I find it easiest to have tenant deposits in a checking account, because we only refund deposits through checking and by mailing to a physical address provided by the tenant; this gives us something for tracking purposes in case anyone claims fraud later on. This way, we don't have to move any money at all, just write the check against the deposit. But if you wanted to use a savings account and transfer the money when you had to repay a tenant deposit you could do so.

JD Martin · Answer

Nope, more complicated than it needs to be. If you feel like you need a whole separate account for emergency funds because you wouldn't trust yourself not to spend it, you are probably not ready for RE investing, as being a successful real estate investor requires a lot of discipline. By the time you get to RE you should be way past having to have emergency funds in its own account. Anyway:

1. Account 1: tenant deposits

2. Account 2: W-2 job

3. Account 3: Business operating account.

In your example, you would figure out what the fair market value is for your side of the duplex and transfer that money (your share of the "rent) into Account 3 from Account 2. Tenant money goes into Account 3. Pay everything for the property from Account 3. Account 2 gets all your W-2 expenses and revenue. Account 1 holds the deposit. If you take tenant payments electronically, maybe a 4th account that the tenants can access that you immediately bounce that money to Account 3. That's what I do. My setup is like above and I have a bunch of houses.

Andrew Bissada · Answer

So would it look something like this:

Personal Checking Account (PC): $10k (this is where money is deposited from a W2 Job

Personal Savings Account (PS): $20k (6 month emergency fund)

Business Checking Account (BC): $0

Business Savings Account (BS): $1k (this is where security deposits,  tenant vacancy, and money for repairs/capex goes)

?

If so, then what is the process flow? If money from my job is deposited into my PC, then I have to transfer some to PS, some to BC, and some to BS every month (assuming I am paying mortgage with the BC) ?

For example, every month would I do the following(assuming I get 4,000/month cash from job, and 1,400/month from tenants. This example is based off a 300k house with a total mortgage payment about 1800 + utilities and other items):

Transfer $300 to PS

Transfer $2200 to BC

Transfer $300 to BS

?

Jeff Filali · Answer

Definitely worth using QuickBooks from day 1 to get in the habit and always keep better track of everything.  As you grow, its all about taking advantage of all the tax deductions you can.

Andrew Bissada · Answer

Would you say this is still the case (multiple accounts) if you someone is going into their first house hack (I will live in the property)? I do not own any properties at the moment.

Steven Segal · Answer

100% have a separate bank account for your rental. As you grow, it makes things much cleaner and faster. This was something I learned the hard way. Try your hardest to pay for things out of that bank account. I definitely tried to use expenses as a way to get credit cards points. It was definitely not worth it. You can always get a bank credit card as well.

Going one step further, I think having Quickbooks is worth it. For one property, it is cost prohibitive. However, using Mint might be an option as you can essentially setup a chart of accounts on there.

Lynnette E. · Answer

I have one checking account to receive funds and to pay the bills.  I have one savings account that is dedicated to holding deposits only.  I have another savings account for CAPEX, repairs, rehabbing and buying property.  Both savings accounts get a minuscule amount of interest.

Keeping track of RE Finances & Taxes?

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