How to organize finances when renting property

Question

Hi,

Just starting out as a landlord (with a single property), and wondering what the best way to set up finances is. I currently operate out of my personal bank account, but was told it's a good option to set up a separate business bank account for everything involving this property (rent, any expenses associated, property management fees etc.) Should I pay my mortgage out of this "business" account as well? And what are the tax implications if I make money/if I lose money at the end of the year? Any advice appreciated.

Thanks!

Ron Brady · Answer

Congratulations on getting started! We created a separate LLC and then set up a business checking account for the LLC.  If you've not done so already, there is plenty on bigger pockets and the internet about whether to set up an LLC or not.  We decided to before we purchased our first property.  We run everything in the business--rent, mortgage and expense payments, etc. through the LLC bank account.  Then, we also decided to use Stessa, a free accounting software for real estate investors.  We really like it and would recommend it.  It takes some work to set things up right, but we figured it out using Stessa's guides and common sense.  At tax time, we really relied on the end of year reports we got from Stessa to properly complete our taxes.  Good luck!

Brandon Rush · Answer

Hey Rita, congrats on your single family. Right now, I have two rental properties and I have a separate checking account for each one. Assuming the properties are in your name and not in an LLC, you do not need to create business accounts. You can just have an additional checking account added to your current personal accounts specifically for this property. From that one checking account you could do the following:

1) Use an electronic rent payment solution which allows for rent to be sent directly into that account. I currently use TenantCloud for my property management software and I am able to direct all electronic rent payments to their specific property checking accounts automatically. If you tenant's pay with check, you can take a picture of the check and deposit it electronically into this account.

2) Order checks for that specific checking account. You are bound to run into vendors who still only take check or cash for payment. You can order and use checks tied to this account for paying them.

3) Set your mortgage payment to auto debit from this account. Both my mortgages auto debit from their respective checking accounts on a monthly basis.

4) Order a debit card for the checking account. This will allow you to may payments and place orders under that same checking account using your debit card.

By me implementing these processes, it has pretty much made the moving of money between tenant rent payments, mortgage payments and vendor payments pretty seamless and hands off.

In terms of managing finances, I use my property management platform to document everything. You could probably get away with using spreadsheets but I personally like to keep it all tied together for simplicity.

I do not worry too much about breaking down each checking account into smaller buckets for capex, vacancy and etc. As long as my withdrawals from the accounts are due to normal maintenance, they remain pretty balanced.

I hope that is helpful and please feel free to reach out with any questions!

Drew Sygit · Answer

At least set up a DBA, so you can open a "business" bank account. All rents should go to that account and all expenses paid out of it.

If you have to cover shortages, transfer from your personal account to DBA account. Make sure you track these amounts, so you know how much to transfer back to your personal account when the business acccount has the funds.

Do your best NOT to mix business & personal transactions. Keep them separate and it will make your year-end accounting much easier and lessen the chances of an IRS audit.

Michele Fischer · Answer

The only costs you are legally required to segregate are the deposits collected.  Beyond that, it depends on how disiplined you are in keeping good records.  The less confidence you have the more accounts you should have.  This doesn't need to be big and complicated, Excel spreadsheets work great.  Fewer accounts will help tools like mint.come or pocketsmith.com work well if you don't want a full blown system.

Rental properties are often called a way to reduce taxes, but if they are initially cash flowing you should expect to pay more in taxes.  When you fill out your tax forms moving forward, there are forms that show a simplified P&L for each proerty and Uncle Sam wants tax on the profits, at the rate of whatever tax bracket you are in.  Tax software does a pretty good job, but studying up on what is recognized as incurred and what needs to be capitalized and depreciated is a good use of time.

James Figg · Answer

Team, I have several properties now and have been creating a separate checking account for each property. I can see everything in one place with the Chase app which makes it easy to keep track of what is going in for each property without having to keep things super detailed. They also have the option to assign what each expense is by category now which I plan on trying out. As I grow I plan on hiring an accountant. Does anyone have any they would recommend either in California or Arizona?

Basit Siddiqi · Answer

@Rita LoI agree, it would be helpful to have a separate bank account for only your rental activities. This will make it easier at the end of the year for you to quickly determine what is a business deduction.

Accounting Software Recommendations - Quickbooks(Desktop), Quickbooks(Online), Stessa, XeroOnline Storage to save receipts recommendations- Google Drive, Dropbox, Apple DriveExcel - to save information such as tenant name, lease start date, current rent, etc

Tony Kim · Answer

I have several properties, but I do everything out of a single checking account. I keep detailed records of every single transaction in a separate spreadsheet and I imagine this would be much easier to do when tracking just a single checking account instead of several. I'm obsessed with performance metrics and so I track every single dollar that comes in and out of the account and I have my spreadsheets automatically update their performance metrics with each entry I make. Each transaction is categorized and summed for each year and so all I need to do is copy the number from my spreadsheets when filling out my Schedule E at year-end. My spreadsheets are set up so that I know how much rental income came in and how much went out for 5 or 6 difference categories of expenses each year. I also calculate my depreciation and PALs carryforward just to make sure TT is calculating everything correctly.

Everyone has a different way of doing things, but I'm more than willing to learn something new and perhaps change my ways if it turns out that using a single checking account is bad. Of course, I keep separate brokerage accounts for cash I set aside and ready to be deployed into new investments. But for my day to day operations, not only do I have one account for all my properties and syndications, it's the same account I use for my W-2 direct deposit and also to pay my day to day household bills, lol. I guess my main rationale is, if you haven't been tracking your expenses on a daily basis, good luck when tax time arrives! Because going through your checking account to figure out everything is going to be one heck of a task, even if you have a separate checking account for each property. I don't even look at my bank statements or activity when doing my taxes....just my spreadsheets.

Ryder Cotton · Answer

Lots of good options here! :) I just set up an additional checking's account under my primary acct w/ Chase. I can use that account to write checks from, and even make utility/mortgage payments directly from the account. Lastly, I even have a debit card associated with the acct. Just keep track of what your buying and copies of your receipts. You should be able to use an excel sheet until you begin to scale.

Joe Splitrock · Answer

@Rita Lo I would setup a separate business checking account at the same bank as your personal account. I would also setup a savings account to sweep money from your checking account when the balance grows. Put all deposits and pay expenses from that account.

Taxes are completely unrelated to whether you use personal or business accounts. Taxes are complicated for rental properties and you need to setup time with a tax professional or read up substantially on the matter.

Scott M. · Answer

You will get a mix of opinions but I would set up a separate account.  Not good to mix and mingle biz and personal accounts.  I would also talk to your accountant.  Chances are, that person will have a chart of accounts they will want you to use to keep things straight and to report back to them.

You want to follow what your team needs to make it easier on them and cheaper on you : )

How to organize finances when renting property

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