Bank account for rental properties

21 Replies

So I am about to collect my first month's (plus last and security) rent on my first property - rental application in, background checks complete, initial deposit provided in the form of a check... but I don't have a bank account yet, other than my personal accounts. Is this a problem?

Is there any reason I should not just deposit these initial checks into my personal account and then work on getting a business account, or another checking account set up later on. Ideally, I would like to get the checks deposited ASAP to keep this moving forward, but don't want to get into any tax issues, etc that I am not aware of.

Also - second question is what types of banking arrangements do most landlords/investors have? Do you set up separate accounts for each property? Is it best to use a regular checking, or is a business checking better? Why?

Thanks!

I have maintained separate bank accounts for each. When filing tax returns, it was very easy to look for expenses and incomes.

@Pari has the right idea. The short answer to your question is to set up a separate account in your name just for your property. Even though it's in your name this will help you keeps books throughout the year and help you track expenses and revenues. You or your CPA will thank you in 10 months.

Long term you will have decisions to make on how up want to structure your business so that you can do what works best for you.  Keeping good books is important in any business and separating accounts will help. 

Business vs personal.....do you want to scale and file an LLC at some point? The longer you own and operate a solvent business the better your business credit will be (Expect 3 to 5 years of tax returns to help substantiate your biz).

I hope that helps.

I agree about the separating for help with organizing your taxes, for sure. Even if not for the taxes, you at least want to be able to have a running picture of your income vs. expenses. I don't use my bank statements to help with taxes because I have a property manager on my properties so I send my accountants the year-end statement for all the properties, but if I were landlording myself, oh man I would definitely be referring to my bank statements (critical really, unless you want to do some major sifting). 

I wouldn't do a business account unless you actually have a business entity in place. Business accounts often have higher fees, for one. I send all my properties' income into one personal checking account separate from the others, and all the mortgages are paid from the same account. That way none of my personal normal money is touched in the process unless I want to withdrawal funds from it to play with.

remember to deposit the security deposit  in a separate bank account so that they available to the tenant when they move out. This is required here in NY state.

Just go to the bank and  say I want to open a new account with these checks. It would be an  account in your name. you can link it to your own accounts to decrease fees but use it only for the rental property. Also get a credit card that only the items for this property are charged to. Helps with accounting.  It is fairly quick, you can even do it Saturday morning. It depends on your state if you need a special account for the security deposit. here we don't.

I think its to open separate accounts for each property, I would find a competent accountant /CPA who does real estate investing and seek his advice.

I think its too complicated to open separate accounts for each property, I would find a competent accountant /CPA who does real estate investing and seek his advice.

Okay, here it goes.  If you want to be a landlord, then think of it as a BUSINESS!!!!  Therefore you need a business checking account.  

Landlord's usually are a Sole Proprietorship. Some choose to be an LLC. Some choose, (big time landlord's) to be a Corporation (usually over a million dollars in revenue)

A DBA name is a "Doing Business As" name scenario. This means you don't need a Tax ID #. You can file your taxes under your own name and Social Security Number, but list your business as a DBA name for letterhead purposes, business cards, etc.

Being an LLC or higher, means you need to hire an attorney to handle your cases. If you are a Sole Proprietorship you can handle your cases yourself. (But you better know your law).

You CANNOT co-mingle your personal stuff with your business stuff, plain and simple!

Tenants Security Deposits are to be kept in their own Bank Account or be a sub bank account of your business bank account.  Some states require it to be in an interest bearing account, so check your state law.

If you try to co-mingle your personal checking account with your business transactions, you are asking for problems down the road.  

It is so easy to rob Peter to pay Paul, when you find yourself strapped for money when it comes to unforseen circumstances. 

It is imperative that you keep track of every transaction made regarding depositing Equity into your business account (from your personal account or wherever), to Security Deposits received and accounted for; to repairs on the buildings you own, and the units occupied by tenants; and let's not forget the damages. 

To try to combine all this with your personal stuff is suicide.  

In order to purchase more homes, or get loans of any kind to grow your business you need to provide the Loan Officers or Hard Money Lenders, that you are a business and they want to see your BUSINESS CHECKING ACCOUNT, not a personal checking account mixed in with a business.  They will tell you pretty quick, Next Please!

So, open up that Business Account so you can be the true Professional that I believe you truly are.  

Nancy Neville

No you do not need a checking account for each property!!! Overkill .....

One checking account for your business and one checking account for your Security Deposits. 

Nancy Neville

Agree 120% with Nancy!

The reason any accountant would love you for having separate accounts for properties is because of the extra work they can bill you for, pure and simple.

You need 2 business accounts, one operating account and one escrow account.

Deposits are not your money, pre-paid rent should be recognized as received on a cash basis with it being a liability until the rent is realized. You owe the tenant that last month's rental period.

Escrow requirements vary from state to state, so check the law. Banks might not pay interest on escrow accounts, if they do, and the tenant is entitled to interest, then you may be able to charge the maintenance fees of the account to the interest earned and allow any excess to be credited to the tenant. You may be able to simply say that interest earned is for the maintenance of the account, otherwise if not stated in you lease, you may owe the tenant interest. Knowing escrow requirements is just like having to know discrimination laws, it's part of management.

Comingling business funds with personal funds kills the liability protection available from your business entity, do not mix funds. When you need some personal money, write a check from your operating account to yourself and mark it "Drawing" or "Draw".

Nancy made a good point as to lenders and seeing different accounts or comingled funds, it shows poor money management, not something lenders are impressed by.

Accounting is the language of business, if you don't know the basics then you really can't talk business. I'm sure there are accounting 101 and 102 classes on line, that's all you need really and your accounting bill will be less due to your proper classifications of accounts, very easy to do. While many use accounting software, you still need to know where to plug in the numbers.

Can you imagine Brookshire-Hathaway having separate bank accounts for all their properties? That's just plain silly. Use one operating account, a chart of accounts breaks down each property within that account.

Another point, each checking account costs your bank to manage, if you have 6 different accounts that you have a low average balance in, they aren't making anything really, one account cuts their expenses and makes them smile with larger balances. That's what a loan officer wants to see to make them smile.

BTW, not asked here, but....the ultimate craziness is having separate business entities for each residential property with its own bank account, your entity must have reserves to operate as a business to be recognized as a business, the liability matter again. You'll end up having idle funds sitting in separate bank accounts that you can't really use. So learn how to consolidate properties and use insurance if you don't sleep well.   :)  

I have a separate account for each property (for 10+ years) and it's not complicated at all. I give my tenants deposit slips and they deposit the rent, any expenses come out of the appropriate account and at the end of the year I print an activity report and compile income and expenses fairly easily. I do bill pay for everything and can schedule mortgage, taxes and HOA fees and other bills automatically. You do not need a business account and other than security deposits you can co-mingle anything you want because you "are the business".

Excel will be your friend. Don't waste your money or time on accounting software right now.

Keep it simple.

Although you could probably get by with your collected rents and rental expenses being mixed in with your personal checking, I will tell you that you are better off with having a separate checking account for the rental property. Now, that separate checking account does not have to be a "business checking" account, it could be a "personal checking" account - just don't mix in your own expenses with the rental expenses. In the end, this will make bookkeeping simpler, and software such as Quickbooks is another tool to make bookkeeping an easier task. 

Now, with a separate checking account, you should also get a separate debit card, so that incidental expenses can be debited from that account directly. Again, it will lead to easier bookkeeping. And getting separate credit cards that are used just for the rental is another good thing to ponder. 

Security deposits, OTOH, are not your money, that is the tenant's money. In PA, you are required to put security deposits into a separate bank account in the second year of a lease. I have been opening the accounts from the outset rather than waiting a year, that way there is no doubt as to who the money belongs to.  You will want to find a bank that really knows how to do landlord-tenant accounts properly; from recent experience, I can tell you that TD Bank is not the bank to use for this (they have 1099'd interest to me rather than the tenant and nobody there knew how to fix that properly, and they also allow the account to go dormant when there is no activity and your security deposit accounts will probably be inactive most of the time).  To open such an account, you will need an IRS W9 form from the tenant - that is what the bank will want, and the tax ID there should be used to credit any interest earned. 

Co-mingling is just fine until your first Audit with the IRS. 

The IRS will target someone who doesn't have a CPA handling their accounts, and claiming rental  income and expenses, more so than someone who has a CPA.  

The Government figures that if you have a CPA, chances are you are complying.  Whereas, if you don't have a CPA, they may take another look at your Taxes.

And too, it depends on if you have one house or two.  I still don't recommend co-mingling, but with that small of an investment, you could get away with it as long as you have a CPA filing your taxes for you.  So maybe that is how Bob gets around it. 

But once again, you need to check your state laws regarding Security Deposits. As said above, it ain't your money honey!  Yet !

Nancy Neville

For those who say no to software like Quickbooks and instead suggest Excel. Consider cost of Quickbooks is somewhere between $150 to $200 for single user installed on a PC. Consider that a CPA bills by the hour, say at a rate of $200+. How many hours will the CPA spend manipulating data in Excel vs just producing reports from Quickbooks?  If it's at least an hour (as I suspect it will be), then using Quickbooks has a favorable payback period ...

So agree with Nancy and Steve.

Talking about IRS - they can demand a copy of your QuickBooks file. So if you are entering personal expenses and getting audit for business - you will be sharing all your data. AND many times they will not let you condense the QuickBooks file.

For pennies a day (for three years) it is worth any software ONLY if you are looking to grow in your business. 

Decide if you want to be the next successful business owner, reduce stress and not be in the red.

Happy Friday!

A separate account is also very valuable if you ever go for a commercial loan for working capital or real estate.  They will want to see cash flow for your business.

I'm not sure what the law is in PA for handling security deposits, but in NC they must be in a separate TRUST account. For rent, I would still have a third account I use for that business's purposes, but it doesn't necessarily have to be a business account.

I plan on having a property manager for all of my future rentals.  If they hold the security deposits and also give me a year-end statement, do I still need the separate bank accounts or to keep track of things in QuickBooks?  I was hoping to avoid all of that by going through Property Management.

Thanks for all the great and fast responses! 

While I think I ultimately agree with @Nancy Neville and think the business account may make sense as I scale up, given that this is my first property, I went with the advise of @Ali Boone , @Steve Babiak , @Pari Thiagasundaram , @Michael R.and others and just opened up a separate checking and savings account to keep the security deposit separate from the rental checks. For now it sounds like the biggest priority is keeping my own accounting simple, and not spending money that really is not mine. 

Thanks Steve Babiak for info on W9, and poster who mentioned specifically trust acconts for escrow. My bank didnt have a clue, three branches in two states. I have already been charged with the interest, and inactive bank fees. So I shall resolve that issue this week. Due to a hopefully unique family situation, where my initial minor investment was to be in the form of a short term loan, I originally did not separate rental business from personal, It then turned into a heavily leveraged substantial purchase, What a nightmare. I paid a bookeeper well over two months of the smallest rent amount to help me sort it all out for the accountant. And that part is still in the works, and I dont have their bill yet. Fortunately, i have a scanner for receipts, and now dedicate one credit card for real estate and of course separate accoumts.

Originally posted by @J.R. West :

Thanks Steve Babiak for info on W9, and poster who mentioned specifically trust acconts for escrow. My bank didnt have a clue, three branches in two states. I have already been charged with the interest, and inactive bank fees. So I shall resolve that issue this week. Due to a hopefully unique family situation, where my initial minor investment was to be in the form of a short term loan, I originally did not separate rental business from personal, It then turned into a heavily leveraged substantial purchase, What a nightmare. I paid a bookeeper well over two months of the smallest rent amount to help me sort it all out for the accountant. And that part is still in the works, and I dont have their bill yet. Fortunately, i have a scanner for receipts, and now dedicate one credit card for real estate and of course separate accoumts.

So the bank you had set up the tenant security deposit account did not know how to handle them properly, based on you getting the 1099-INT and getting the account tagged as inactive.  Was the bank able to resolve things completely and to your satisfaction?  I suspect it will be difficult for that to happen because the clueless bank sounds like it just does not understand how these accounts are supposed to operate.   If the bank hasn't corrected the issues, start contacting other banks and ask questions that you now realize are pertinent. Once you find one that truly understands, make sure to have a W9 form from the tenant to open the account with the new bank so you can have the satisfaction of closing the account with the clueless bank :)

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