What account pays for common expenses

16 Replies

I just closed on my first deal consisting of two duplexes next to each other but they are on separate parcels. We did do two separate conventional loans which was recommended by the lender.

I know there are a lot of opinions about various different strategies on how to hold the properties and how to manage the finances. At this point I have chosen not to go with an LLC just yet and hold them just in my name as my lawyer recommended.

Since I only have two properties so far, I have created separate checking accounts for each property to keep expenses separate as was recommended by a number of people on Bigger Pockets who only have a handful of units. My question is, for those of you with separate checking accounts for each property, how do you account for and pay common expenses that can't be attributed to one property or another?  Which account does it come out of? Do I need a third account and if so, how do I fund it?

I have been looking for a CPA and an accountant to help me set things up but the 2 I have talked to so far are not as versed in real estate as I would like.

Dave

@Dave Garlick - Let me start by saying I am not an accountant, so the phrasing or exacting wording I use my not be correct. But having separate checking accounts for each property seems like a nightmare. In my opinion I would only do this for large scale properties in their own LLC. But if they are all held in your name just use one checking account. Then your accounting software would be able to keep track of expenses for each property.

Then my accountant setup a cost segregation function (I think that is what she called it), where when I have a general expense it gets divided across my properties based on unit count. As an example if I had 10 units, and a $1,000 general expense, it would allocate it across 10 properties.

I don't have a dedicated account. I keep everything on an excel workbook with a sheet for each property, a summary and detailed sheet for total rental cash and income, and a balance sheet. My last tab is for common expenses split. In my case, I have a HELOC that purchased a small condo and supplied the down payment on the other. It calculates the split for me. I only have 3 accounts: security deposits, personal checking and savings. My spreadsheet tells me how much I made.

@Andrew Kerr I use a separate account for each property and it is not a nightmare. I'm just careful to pay expenses out of the correct account. By doing so I have zero bookkeeping to do, except at end of year for tax purposes. And that takes about 15 min per property.

For the OP- If you have an expense that is common to both properties simply divide it in half and pay half from each account. Of course keep your invoices on file just in case you are ever audited.

@Max Tanenbaum There are always multiple ways to do things. Glad you have a streamlined system. 

For me it came to scale. I have fewer properties this year as I sold off 24 doors last year. But I couldn't imagine having 15+ separate checking accounts. When depositing checks having to fill out multiple deposit slips. Or having to write 15 separate checks (or doing multiple transfers to a single account) to pay for one common expense. Not my cup of tea. 

For my general holding account I keep one checking account, then three savings account. A savings/trust account for security deposits, a savings account for taxes/insurance/capex, then a savings account where I put my reserves and extra cash that will go into my next deal. My one checking account covers all the properties, and the accounting software keeps it separate/tracks it. Same for the trust account, all the security deposits are in there, but the accounting software keeps track of the amounts. 

@Dave Garlick as to finding an accountant versed in real estate investing, go to your local REIA. Find the folks that have multiple properties or have been in this arena for a while. Then ask them who they use. Easy way to get a good referral.

@Andrew_Kerr. What accounting software do you use?

@Shawn R Gilronan I used Buildium for property management and accounting till last year when I downsized.

Now I just use quick books.

I have separate accounts for each of my 7 multi-family properties.

I also use Rentalutions to collect all rents and security deposits.

I set up Rentalutions to deposit each tenant's rent into it's correct Property Bank Account.

All expenses for each property is generally auto-deducted, especially Property Taxes, Electric, Gas, Water, etc.

Because Rentalutions also has Maintenance, tenants send requests and I either take care of it or call a Contractor.

I have a separate account for common expenses. TD Bank is free over $100 minimum deposit. So each property pays a prorated portion for the minimum. Any common expenses gets divided by number of units in each building.

All receipts are generated by a debit card per building.

So if Uncle Sam every knocks on my door, everything is completely separated with all receipts and deposits and electronic payments of expenses.

It's so simple to do... or maybe it's because I've been doing this for 20 years?! I doubt it.

I've also went completely electronic with DocuSign Leases and rental applications.

I think once you set up everything Automatically, expanding is a piece of cake!

Originally posted by @Dave Garlick :

I have been looking for a CPA and an accountant to help me set things up but the 2 I have talked to so far are not as versed in real estate as I would like.

Dave

 Dave I can highly recommend @Daniel HymanMy Online Accountant, LLC well versed in real estate.

Thanks everyone for your responses. It's always great to hear so many different ways to approach things. 

@Yonah Weiss Do you find that that it really doesn't matter if you can meet your CPA face to face? I have heard some people feel it is important. I'm not sure yet but it seems to me that at this point I might feel the same way. Have you ever had any issues?

Originally posted by @Dave Garlick :

Thanks everyone for your responses. It's always great to hear so many different ways to approach things. 

@Yonah Weiss Do you find that that it really doesn't matter if you can meet your CPA face to face? I have heard some people feel it is important. I'm not sure yet but it seems to me that at this point I might feel the same way. Have you ever had any issues?

Great question Dave. Like any trusted adviser you have to go with your gut when choosing the right CPA. For me, one meeting is usually enough. But more important, is if the CPA has great recommendations from peers. As a real estate investor, it is also important to find a CPA who is like-minded. Just like he is looking for the best ways to save on taxes for himself, and is constantly learning new ways and strategies, he will likely provide his clients with the same mechanisms. Best of luck.

@Dave Garlick

how do you account for and pay common expenses that can't be attributed to one property or another?

You have a couple options for this

Option 1)  if the expense is 50% related to duplex A and 50% related to duplex B - If the vendor will allow it - ask them if you can cut 2 checks for the payments coming from Checking Account A/Checking Account B.

Option 2) Pay for the full expense using your personal account and have Checking Account A/Checking Account B reimburse your personal account. Also note the transaction for record keeping in case of an audit.

Option 3)create a third checking account for activities like this. Then remember to give your CPA the expenses related to this newly created bank account so your CPA deducts it on the return.

Your really only need 4 accounts no matter how many properties you have.   1 checking account for rental income and expenses,  1 savings account to put funds available for further investment, 1 escrow account to hold for property taxes, insurance and income tax and 1 personal account.   Use an accounting software like QuickBooks Online Plus - with class tracking to keep everything separate and you are golden.   The online version allows for phone apps too that can take a quick picture of the receipt and store that  receipt in the cloud attached to each transaction.  Very simple, fast and very effective!   There are on-line bookkeeping companies that can help you get this setup right!

Hi @Dave Garlick . We saw huge benefit in separating our day-to-day bookkeeping needs and concerns from our once-a-year tax filing needs.

We learned (the hard way) that questions like "what account pays for X" often have bookkeeping implications as well as tax filing consequences. Without considering both, it's easy to do something that might save you $1000 bucks on your taxes but cost you $3K a year in extra time to implement.

We've had an accountant for two decades, but we only recently engaged a bookkeeping service to help us build and implement the daily financial management systems that lead to better, more strategic financial decisions.

Man, do I wish we had done this from the start!

Lastly, for the record, our new financial management is waay out of state, and that hasn't created a single issue for us. What we care about more is that they are supremely competent and have many other real estate clients, some waay more advanced than us. So, we get to benefit from the best practices of these other sophisticated investors as well!

Since you're still in the exploratory phase, I would encourage you to chat with these folks (and others, of course!) and see if they are a match. They are here on BP but I want to respect their privacy, so connect with me here if you'd like their contact info.

For the record, I receive ZERO compensation for making the referral: I just know how big a deal this can be, if done right!

Congrats on closing your first deal, @Dave Garlick!

Echoing the experiences of @kevin schulz and @mitch messer, I would advocate setting up a full accounting system to track expense categories, rather than trying to do so primarily via bank accounts.

The work-arounds for dealing with split/overhead expenses are going to be equally time-consuming as dealing with record keeping within accounting software, but with a full bookkeeping system you get the added benefit of financial reporting at your fingertips. It's powerful information and provide you with insights into the financial health of your business that you won't be able to see by tracking bank balances. 

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