One of the most common missteps I see with beginner investors is using one bank account (likely their personal checking account) for both personal expenses and rental income and expenses.
Most people don’t see this as a big deal but it could cause a host of problems both currently and in the future.
Simply put, using one bank account for everything is messy. I’m a CPA; I hate messy. I’ll wager that goes for all other accountants, too.
The more mess, the more time it takes to clean up, which could result in a higher fee charged by your CPA.
How do you combat this? Systems and processes!
Although you may not absolutely need fully implemented systems and processes when you only have a couple rental properties, it doesn’t hurt to start good habits early.
Opening a separate bank account for each property is, believe it or not, an accounting system; reconciling them is a process. Separating bank accounts makes it easier to track income and expenses by property and, therefore, makes interim and year-end reconciliations 100x easier.
Also, if everything is purchased with a different debit card, organizing receipts is a breeze. Gone are the days of writing the details on each receipt designating the property each expense pertains to.
Let’s be honest, if you own a couple rentals and run everything through your personal checking account, what are the chances you remember what that $124 expense in April was and for which property it was purchased?
Another reason to open separate bank accounts is for liability protection. Commingling business and personal funds implies that the two are not separate entities, meaning you and your business are essentially one.
I don’t think I need—nor am I the right person—to explain that not being considered separate from your business could lead to issues if dealing with a lawsuit or similar situation.
If a tenant trips on your driveway and sues you, an argument could be made that all the money in the account is accessible—even if the majority of the funds are personal and unrelated to the business—because 100% of the business is being conducted out of the same account.
Don’t put yourself in that position; it’s much easier to open a new bank account than deal with the possibility of that headache.
What Type of Account Do I Open?
I get this question a lot. Although you’re technically running a business by owning and managing rental properties, opening a personal checking and/or savings account for your rental is perfectly fine.
The key here is the separation, not nature, of the accounts.
If your property is owned by an entity, however, you should open a business bank account in the name of the entity.
What Happens If I Accidentally Use the Wrong Account?
What happens if you accidentally buy something using the wrong debit card or deposit a rental check into the wrong account?
You will go to jail.
Mistakes happen – just make sure to reimburse yourself or transfer the money from the wrong account to the right account. You won’t run into any issues if this happens sporadically but definitely do not make a habit out of it.
What to Do as You Build Your Portfolio
Obviously, more systems and processes have to be put in place as you scale and grow your portfolio.
As unbelievable as it sounds, some would argue that bookkeeping and systems implementation are boring and a waste of time.
Shocking, I know.
There will come a time, however, where it will make sense to outsource the tedious, low-value tasks like bookkeeping and recordkeeping. This will free up more of your time to search for more deals, bring more value to your business, etc.
Once you own more than a few properties, reach out to your CPA and ask about the best ways to implement efficient and effective accounting systems that will allow your business to run like a well-oiled machine.
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Aiola CPA, PLLC is a 100% virtual CPA firm, specializing in tax planning and preparation for real estate investors. See more at www.aiolacpa.com