The Flow of Money in relation to Rental Properties

17 Replies

Hello BiggerPockets community,

I have titled this post "The Flow of Money", so it does not get confused with the term "Cash Flow". I have just purchased my first rental property, and am trying to understand how the money is going to flow from one place to another. In the case of my first property, I have decided to not set up an LLC, I will do this once I obtain 1 or 2 more in the future, but right now I want to try to keep it simple; Here are some of the questions I have:

When I receive my rent checks, how does the cash flow get to my personal bank account, where I have freedom to spend it?

Should I set up another checking and saving account specifically for this rental? I do not have an LLC so this would still be a personal bank account. should it be through a separate bank, or my personal bank?

If it do set up a separate account for this property, can I have the mortgage payment directly drawn from this account?

What do I do when tax time comes, and will they define my taxable income differently that what I have determined my cash flow to be?

Where do I keep the security deposit and repair funds?

Should I open up a new checking and savings account with each new property (this seems like it would be very hard to keep track of all these different accounts). 

How do I pay myself?

Should I pay myself monthly, or yearly? 

When I do form an LLC, how will all this change, and is it more complicated?

I would greatly appreciate any help I could get in understanding this idea of "The Flow of Money". Thanks in advance!

Kole

Well, I established a mgt co s-corp right away just to receive rents and handle expenses, but if I didn't and received rents and deposits in my own name (that just sounds weird to me!), I would have a separate bank account. Preferably in a different bank.  I'd run my other small rentals through the same new account.

Rents will come in and expenses go out of that account. Taxes will be done on your Schedule E of your 1040.  This designated account will serve as a good p&l for you. 

Deposits are handled per your state requirements.  A trust is usually required.  Some states require you to pay interest.  Learn your state landlord-tenant laws.

Congrats on keeping it simple and not getting an LLC for little houses with debt @Kole Kingslien .  I waited to do an LLC until I had commercial assets, but the mgt co was right away and a tenant has never paid rent to me personally.

Get QuickBooks that will be a tremendous help. I would set up two accounts one liability account for holding security deposits and one operating account for receipt of rent and paying expenses. You can set up a different account in your QuickBooks as a separate company just to track balances Etc. Another beauty of QuickBooks is not only recording your expenses but also keeping track of any Capital Improvements because he will need specifics on those for variable depreciation times. I a hundred percent agree with Steve you have no need to set up any sort of llc at this time but you should buy liability insurance immediately. Print out a copy of your state landlord tenant statutes become familiar with those and make sure you adhere to those to protect yourself and your tenant. If you have other specific questions feel free to ask me and I will help you if possible.

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Keep in mind that as a individual investor, having no employees or partners, all monies coming in and going out is yours.

You should set up a separate account for all rent deposits from a given property.

You take your money from that account and move it to where ever you choose, expenses, investing, personal toys what ever you choose. Remember it is all your money regardless of where you put it.

You should set up a separate account for each property, this simplifies book keeping. The property can then be itemised by it's bank number if you choose.

Paying yourself is simply a numbers game since you will be taxed on every dime of rental income after all expenses, deductions. and excluding any income money you are able to hide (such as tenants that pay in cash if you choose)..generally speaking.

Deposits are to be kept in a separate account for each tenant as well as any pre-rent payment you may choose to accept.

@Thomas, thanks for the input!  Wouldn't creating a new account get difficult to track once you have 20+ properties?

Book keeping is all about numbers. For tracking purposes, expenses, collection rates, vacancy rates etc. you need to keep properties separate some how if you want answers. If you do not need to track then one account is all you need. Deposit all rents in, move to your working accounts from there.  

I would highly recommend you get QuickBooks on-line.   You can have 1 bank account for the business at the same bank as your personal accounts are at.   However, you would be best off to have 4 accounts total including personal.   1 account for tax & insurance escrow, 1 account for all the transactions related to your business (rents in/expenses/mortgage pmts out), 1 account for savings for investment cash, 1 account for your personal stuff.

Quickbooks can then separate all your properties and personal stuff by using the class feature.  Transactions flow directly from the bank to QB and all you have to do is assign an expense category and which property it belongs to.   If you use the phone App for purchases, you can take a picture of the receipt and it gets stored in the "cloud" right with the QB transaction for future reference.   

There are bookkeeping companies that can help you get this setup right too.  Setting things up correctly to begin with makes a big difference in the long run.   Good luck!

Originally posted by @Kole Kingslien :

@Thomas, thanks for the input!  Wouldn't creating a new account get difficult to track once you have 20+ properties?

Most accounting software has the ability to securely connect a bank account to a book of accounts. You establish a separate book of accounts (Wave calls this a 'company', I think Quickbooks calls this a 'case') for each property and connect the property's bank account to its set of accounting books. If you do all your transactions for that property through it's dedicated bank account, then the software will automatically do all the tracking for you. 

Nobody gets into real estate investing because the bookkeeping is so dang fun.  However, you can go to USTaxCourt.gov and read hundreds of tax court cases every year that end with the tax payer forking over additional taxes and penalties to the government because they didn't bother to keep good records. (Or you can read my BP blog where I summarize some of the court cases.)

Figuring all this out is worthwhile, and I salute you for the asking the questions. This is important stuff.

Best of Luck with Your Real Estate Investments!

Below in bold are my answers to your questions, mind you this is how I do it and not the only way to do it.

When I receive my rent checks, how does the cash flow get to my personal bank account, where I have freedom to spend it?

You can write a check to yourself from the business account that you set up.

Should I set up another checking and saving account specifically for this rental? I do not have an LLC so this would still be a personal bank account. should it be through a separate bank, or my personal bank?

Come up with a name for your business (Kingslien Rentals for example). Then you file with your state for a fictitious name (DBA, or Doing Business As). This is easily done with a form you download from here. The cost is $15. Once you have that you can get a EIN (Employer Identification Number) from here. They are free and instantaneous. Once you have those two documents you can go to any bank and open a checking and savings account in the name of Kingslien Rentals. The checking will be for rent checks and all expenses and the savings account will be for security deposits.

If it do set up a separate account for this property, can I have the mortgage payment directly drawn from this account?

See above, and the mortgage payment is a business expense and should come from the business checking account.

What do I do when tax time comes, and will they define my taxable income differently that what I have determined my cash flow to be?

Yes, it will be different. Most of the expenses will transfer over verbatim but most specifically any loan pay down will be considered income and not an expense, so only the interest portion of your mortgage payment will be considered an expense by the IRS. It is imperative that you speak with an accountant ASAP so that you are on the same page. It will cost a little bit now but will save you come tax time.

Where do I keep the security deposit and repair funds?

Although not legal required security deposits should be held in their own savings account. In Wisconsin they do not need to be held in a trust and you are not required to pay the tenant interest. If you wish to save for repairs outside of your checking account then set up a separate savings account for that purpose.

Should I open up a new checking and savings account with each new property (this seems like it would be very hard to keep track of all these different accounts).

You can, but I do not. I use quickbooks for everything and keep each property separate using the "class" feature. This way I can use one account for all rentals but I can still generate reports for each individual property.

How do I pay myself?

Write a check or make a withdraw from the Kingslien Rentals checking account.

Should I pay myself monthly, or yearly?

That's entirely up to you. You can pay yourself daily if you wish.

When I do form an LLC, how will all this change, and is it more complicated?

Honestly if you set it up as outlined above nothing will be different when you form an LLC.


All of this being said I highly recommend getting quickbooks to track everything. Operate the business as if it were it's own entity, track everything and enter it into quickbooks. If you have any other questions just ask.

@Kole Kingslien I would pick a company name such as Kings Properties. Then setup a business account as DBA (doing business as) Kings Properties. You are not setting up a legal entity, but rather a personal business that is DBA. That allows you to put Kings Properties on your account instead of putting your name on the checks. It differentiates the business and provides a low level of separation between business and personal. Setup a checking and savings account under the name. Keep only enough money in the checking account to cover your bills such as your mortgage. Transfer security deposit and profits into the savings account. This is because your checking account number is not private and if you are the victim of a scam, it limits how much money can be taken from your checking account. Keep your savings account number private and use that to hold your working capital.

I wouldn't pay myself anything when starting out. I would let the money build to have reserves and to use for future purchases. I would manage multiple properties from one account. We do eight today in one account and it is very easy. Some people recommend a separate account per property, but I find that unnecessarily complicated.

For tax purposes, it really doesn't matter what accounts you put the money in. The only time the IRS will look at your bank account is during an audit. If you are small landlord that isn't claiming any crazy deductions, it is very unlikely you will be audited. Even if you are audited, it doesn't matter if the money was in your personal or a separate business account.

Good luck!

Thanks guys, 

This is some very helpful information! Would you guys recommend waiting to use QuickBooks, until I have a few more properties, and does quick books solve the problem of having multiple business accounts? I have heard a lot of mixed opinions about when to start an LLC, or if I even should. I have also heard of people having separate LLCs for each of their properties? This seems pretty complicated and "messy" to me. Wouldn't it be better for simplicity, if everything was operated under one business entity?

The information and you guys have shared is very helpful, Thanks!

So when I create a DBA, I will do it as a sole proprietor? Will this still allow my wife to sign, write, and deposit checks, as well as withdraw funds and pay bills?

Originally posted by @Kole Kingslien :

So when I create a DBA, I will do it as a sole proprietor? Will this still allow my wife to sign, write, and deposit checks, as well as withdraw funds and pay bills?

You can add her name when you fill out the paper work for the DBA. When you open the bank account you can add her as a signer.

Also I would suggest getting quickbooks from the get go. It can handle all of your bank accounts as well as any credit cards and mortgages, everything. I'd definitely recommend getting a book on quickbooks to get started, maybe watch some YouTube video's as well.

Awesome Nicholas! Thanks for the help!

Would the basic version be fine to start with, or is there some benefit to the other versions?

Hey everyone, 

So I filed for a DBA and got a new bank account set up with an EIN, do I need any kind of business licens or anything else now?

Thanks for all the help and guidance!

Kole 

IMHO quickbooks is overkill for one property An excel sheet will do it just as well. There are some accounting practices in QB like double entry that dont come natural to everyone. Do get a seperate credit card for use for the property. Always use it for your big box store purchases and anything you can not wriite a check for. Also have the reciepts emailed if you can HD does this, it is just easier. If you read the IRS publication on business expenses.It will help you think about what your expenses are.

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