How to manage rental income, expenses etc bank accounts
I am seeking advice on how to manage my cash flow with my 2 rental properties. My wife and I currently have full time jobs and I manage both the properties myself. So far I have been collecting rents in one account and paying the mortgage out of the same account. My question is how should I handle the expense. I have been paying all expenses from our joint accounts and leaving the rental income in the account untouched. So when I have to fix a plumbing issue say $300. I pay it out of our checking account and never reimburse myself from the rental account. Is this a bad way to manage it? Obviously the account grows to a large number this way and right now we can handle the expenses from our salaries. But if we get more properties I may have to change my strategy? Any advice would be greatly appreciated.
Thanks, Jayson
Sounds like you are cutting yourself short! I would definitely use the rental funds to pay for maintenance on the property. That is what you set aside these funds for. I would check your local laws regarding requirements of how the security deposits need to be held, as those are not supposed to be used for maintenance purposes (it also puts you under if they move out and you have to reimburse them their security deposit). What we choose to do is use a savings account for the security (and pet) deposits; that way they aren't touched; and a checking account that is used for expenses. We also detail everything that is paid out ($XXX for plumbing, $XXX for roof repairs). If you have plenty in your rental income to cover these expenses and not be using any of the deposits, then I wouldn't see any benefit for you to be paying out of your own pocket for these repairs. Also remember to keep in mind what is tax deductible regarding your rental property and repairs!
thanks @Ashley Schroeder I am very detailed about all expense but I do think I will start using the rental account to pay for repairs etc. I guess I need to order some checks :(. Thanks again
Also, if you keep all your rental related expenses separate in one account, it'll be easier to do your tax deductions with a dedicated account.
Hey Jayson, You may also want to check out a new landlord management free software that will help. It's called ipayrentez.com If you elect you will be able to accept electronic rental payments deposited directly into your account. Your tenants can pay with a computer or any mobile device. They also give you a free online ledger with your own portal as well as your tenant.
Jayson,
I have a handful of rental properties with a full time job as well. I just wanted to point out one major risk you're opening yourself up to.
When you intermingle your personal funds with your investment property funds you open up all your money to potential law suites. In other words, if something happens to your tenant and they decide to sue you, they can go after all your personal assets since there was never a distinction between the two in the first place.
You may also consider forming an LLC if you haven't already done so for protection, but even then, you still want to make sure your rental properties income and expenses are completely separate from your personal finances.
Plus, doing this helps you to better analyze how your rentals are really performing. Lastly, as someone mentioned above, doing your taxes will be much easier if you keep it all separate. You don't want to cut yourself short on any of those tax deductions. Hope that helps!
Thanks @Korey Rademacher that is my next step once I get my next property.
My sister is a loan originator in Pensacola. Look her up at Trident home loans, Ashlee Warner is her name.
The way I do it, and this is just ONE way of doing it.
I have a business account set up. The business account receives rent, pays mortgage and other expenses. I don't touch the business account for personal stuff. My W2 job pays all my bills and real estate grows my wealth.
The way I do is having a separate checking account where I collect and deposit my rental income. I also have separate saving account for each property as reserves in the same bank where I deposit my cashflow. I essentially pay any expenses from these reserves by transferring back to checking account. I do not intermingle with other personal accounts. Everything related to rental expenses would be paid from these checking and savings account. Easy for bookkeeping as you can link with some free online accounting software, categorize your expenses in proper expense buckets and see how your properties are performing by running some financial reports.
@Jayson Hinkson - Are the properties under LLCs?
1 bank account = income in, expense out, and debt service out
If you are using your own personal funds to pay for expenses.
You need to either
- Reimburse back yourself with the Rental Income
- Increase your capital for your LLCs
One Bank with Multiple checking accounts for each property works? or different banks it self?
(I don't have a LLC)
Originally posted by @Sandeep Reddy:
One Bank with Multiple checking accounts for each property works? or different banks it self?
(I don't have a LLC)
multiple checking accounts in the same bank is fine.
@Simon W.
Thanks
I agree with the other posters recommending all revenue and expenses related to the property be managed through a dedicated bank account...and specifically not co-mingled with personal finances.
This is a good thread to read: https://www.biggerpockets.com/forums/52/topics/383631-method-for-tracking-income-expenses?page=1
I posted my method of tracking income/expenses, and rolling it all up to income tax form income and expense categories. Others contributed their ideas too.