Do I need a separate bank account for my rental property?

Read through almost any “Accounting 101 for Real Estate Investors” article and you’ll find a common refrain among the first items on the list: Keep your personal and business books separate. This is usually followed by a vague explanation mentioning that your rental activities count as a business even if you don’t have an LLC, and a warning about how much harder tax time can be without separate accounts.

For the record- we agree on all counts! But we wanted to take a deeper dive into why this one basic step is so central to keeping better books and running a better real estate investment. From saving you money, time, and reducing your risk, separating your personal and rental business accounts is the foundation of easier, stress free real estate accounting and bookkeeping.

Separate bank accounts will help you save money

Let’s start with the bottom line. You have earnings from your rental properties, and you incurred expenses in the operation of those rentals. Subtract expense from the income and you are left with your taxable income, and you the lower that number is, the less you pay in taxes. As such, your ability to maximize profit from your real estate investments depends on ensuring you recognize every relevant/possible expense and deduction.

From another perspective, forgetting to claim an expense is basically paying an extra tax on that expense. It’s like forgetting to send in the mail-in rebate form like you may see at a department store, and it means you’re paying more than you should.

With your dollars depending on accurately recording ALL your business transactions - would you rather be parsing through one single comingled bank account that also included every single personal transaction in it, or an account with nothing but deductible business expenses? Which method would make you feel more confident that you claimed all your expenses? Which sounds like it would be easier to double check or audit?

A separate bank account makes it easier to claim all your relevant expenses and reduce your tax burden, saving you money.

Separate bank accounts will help you save time

Beyond the monetary impact of truly accurate books as discussed above, also consider the time cost and impact. How much time can you save by not having to go through your bank feeds line by line and ask yourself whether or not that Home Depot trip 3 months ago was for your personal house or rental property? A lot of time is the answer!

Having a separate account means that you can ask the question up front- is this deductible as an expense of my rental business? Making this decision at the time of the transaction gives confidence and clarity to your bookkeeping, preventing confusion, and saving you time.

Separate bank accounts help others help you.

Having a clear division between your personal finances and your business finances also makes it much easier to get financial help. Be it a part time bookkeeper or CPA, they will be more willing to work on your books if they know you have your personal and business accounts already separated. Even if they will tackle a comingled account, keep in mind that they will charge more for the additional time required to do so.

Finance professionals can help you better if you’ve split your accounts, but you can also help yourself better too. Accounting softwares also typically contain a reconciliation feature for business accounts to double check the actual balance of the account vs what the software thinks it should be based on what you have recognized.

Separate bank accounts can protect you

Keeping your personal finances and business (remember- your real estate investment activities are a business!) finances separate is the professional standard across most industries for all the reasons above, as well as for protection for your personal assets. There are no special protections for comingled accounts. If you are being sued and an account is frozen, no consideration is given for any personal funds in the account. All is considered to be part of the business account.

Additionally, in many states it is against the law or regulations to mix security deposits with other funds.

Separate bank accounts allows you to scale

Everything written above is true even if you only have 1 or 2 rentals or investment properties. Everything above is EVEN MORE TRUE once your portfolio has begun to scale. Once you are growing in number of rentals or gaining complexility (like with a short term rental or multi-family property) you will inevitably have many more transactions to manage. Which magnifies both the importance of maintaining accurate books (money) and the amount of work you need to do to manage your finances (time).

So keep it simple! Personal expenses in one account, all of your real estate business expenses in another.

Bonus: How many separate bank accounts should I have?

The most important thing is separating your personal finances from your rental business finances. From there though, it is a valid next question of whether or not more than one business account is needed. As with most slightly more complicated questions, the answer depends on your unique situation.

For most investment property owners, one dedicated operational account should be totally sufficient. As you grow your portfolio and the number of monthly transactions increase, real estate accounting software can help you stay organized and appropriately categorize transactions.

One exception may be owners with a limited number of properties (less than 5, perhaps) who want to keep an account per property. This can work well as long as you maintain good discipline with using the correct card or check for each expense incurred. However, this method does not scale terribly well. Once you have more properties an account per each can get cumbersome to manage, and complicates things when you have shared service providers.

The other primary consideration is the legal entity your investment properties are held in. You should have a separate business account for each legal entity you hold property in, as each entity is itself a separate business that needs to file its own taxes. The axiom could also be keep your personal and business and business accounts separate- and for all the same reasons on the rest of this list!

Conclusion: The foundation for successful rental bookkeeping

There are clearly many reasons that maintaining a separate account is so widely recommended. This truly is step number one, the foundation, the place to start to get your investment property finances organized and under control. All other accounting and bookkeeping best practices flow from here.