Saturday, September 12, 2015

Should I setup a separate bank account for my rental property?

The short answer - absolutely!

When it comes to the finances of managing a rental property, most owners focus on how to collect money from renters - and deservedly so!  Unfortunately, they typically don't take the time to setup the other financial tools that can make managing their rental easier.  In this blog, we will discuss the "other financial tools" we recommend every rental property owner consider. Today's topic - bank accounts.

Bank Checking Account

It sounds silly, but opening up a separate checking account for each rental property you own or manage is something that can save you a ton of time. The benefit to creating a separate bank account for each rental property is you instantly create a separation of financial interests. Whether that's separating your rental finances from your personal finances or separating your finances across rental properties.  

Separating your financial interests can yield HUGE benefits.

Instant Cash Flow Visibility

Cash flow is the net amount of money that flows into and out of your business.  Cash flow is important because you need to have cash at the right time to pay your bills. If you don't, you'll have to contribute more of your personal money, borrow money, sell something or close the doors.

When the cash from your rental property is mixed with your personal cash or the cash from your other rental properties it takes effort to separate the transactions to achieve cash flow visibility.  That effort is typically done at the time you "do your books" (think QuickBooks or your accountant) at the end of the year for income tax purposes.  Not only does that approach take more effort, but it also makes it difficult to respond to cash flow needs in a timely manner.

Save Time and Money with Your Taxes

Every year despite how hard I wish, the dreaded job of doing my taxes doesn't go away.  And every year it seems like figuring out how much tax I owe gets more complicated.  As a result, I've tried to figure out ways throughout the year to make doing taxes at the end of the year easier. Having separate bank accounts for my rental properties has been one of those time savers.

Having separate bank accounts makes it much easier to identify what financial transactions were for each business.  Let's face it, the time consuming part of doing taxes isn't the calculations themselves - it's hunting down everything that goes into those calculations. The more we can do to make that easier, the better.

More Personal Protection 

I'm not a lawyer, so I may be a bit out over my skis on this one.  However, I have repeatedly been told the more that I separate my business endeavors from my personal finances the better when it comes to protecting my personal finances. 

Keeping your financial transactions separate helps re-enforce your rental property is a business and not a personal asset. Ideally, you want to setup an LLC or some other business entity first and then open all your accounts under that business entity.  That takes a little more effort, but may be worth it in the end if something bad does end up going the wrong way.  

That said, don't let setting up a business entity stop you from opening up a separate bank account for your rental.  You can always transfer things over at a later date and you still get to take advantage of the benefits discussed above.

Bank Savings Account

Typically cash flow needs for rental properties change throughout the year.  They have peaks and troughs that correlate to varying rental seasons and/or different expenses.  If your rental property produces a decent amount of extra cash at varying times throughout the year, we recommend setting up a savings account also. 

While it requires a hair more effort to manage transfers between accounts, it allows you to make some extra cash while your money just sits there.  Granted interest rates aren't great right now, but something is better than nothing.  A business account with Capital One 360 currently yields 0.4%. GE Capital Online has 1.05%.  Not a lot, but more than what you would have made letting your cash sit in your checking account.

Summing it Up

Make your rental property life easier and open up separate bank accounts for your rental property.  Open a separate account for each property. Ideally you do it under your business name (i.e. your LLC), but don't let that stop you. If your rental property generates a decent amount of cash, consider opening up a separate savings account too.

Do you have what it takes to manage an effective rental property?

You own a rental property -  check.

You've bought linens, furniture and decorations - check.

You've advertised it for rent - check.

Guests have been paying you rent - check.

Sounds like you've mastered the art of managing a rental property.  Give yourself a hand.  But how are you really doing?  Do you know what it really costs you to own and operate your rental?  Do you know what you really make on your rental property?  How do you compare to other rental properties? How are you performing this year compared to the past?  Are there things you could do to improve the profitability of your rental property?

I'm willing to bet these are all questions you'd love to know the answers to.  The problem is the answers to these questions take time and effort.  Time and effort you could be spending on something else like ensuring you're ready for your next renter.

ClearlyBooked makes it easy and fun to get the answers to these questions and more.  Join ClearlyBooked for free, connect to the companies you do business through for your rental and instantly get answers. Answers to the questions above and answers to questions you haven't even thought to ask.

Join ClearlyBooked.