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I know I talk about the value of utilizing separate bank accounts quite often, and I may seem like a broken record, but it is only because it is still one of the easiest suggestions I can make to my clients to take the accounts from stressful to simple.
As your portfolio scales, your systems will change. Ideally, you'd already have scalable systems in place, but we find that's often not the case when working with our clients.
I think we can all agree that the least fun system to think about is your back-end accounting. As you know, I'm a CPA. I've built a firm on helping real estate investors save on taxes and improve their accounting solutions.
But here's a secret: I hate doing my own accounting.
I outsource my firm's books because I consider the monthly accounting to be a low value task for me to personally complete.
Before I outsourced my books, I would be a month or two behind on our accounting. It's inexcusable, but it's just how my brain works. I prioritize tasks that add immense value to my business and life. Accounting is not one of those tasks.
Being that you invest in real estate, I would bet that our thought processes are similar. Accounting is a low value, boring task. You don't want to do it once per month. You'd rather be brunching with friends.
The real estate investment advice we will discuss today is going to save you an immense amount of time and headache. The strategy is to simply have every income generating activity to be routed to a separate bank account.
Why Separate Bank Accounts
We want to utilize separate bank accounts for one simple reason: it allows us to track each income generating activity separately.
I have two 3-unit rental properties and each has their own bank account. As long as I'm laser focused on making sure that every transaction related to the properties hits their respective bank accounts, my accounts will be so simple. In fact, I wait until December to do any accounting at all.
When every transaction hits the bank account, you can easily print a PDF or download an Excel file and develop out a P&L for that one rental. Compare that to have two or three rentals booking transactions within one bank account. When you download your Excel file, you'll have one running list of transactions for three properties. You'll have to sift through all the transactions each month and assign a property to the transaction. Yikes.
Monitoring Transactions
There will still be times when you swipe your personal credit card at the Home Depot or write a check out of your personal account. You can certainly still do those things, you'll just want to make sure that, at the end of the day, if the transaction is for a specific property that the money comes out of that property's bank account.
For instance, you have three properties, A, B, and C. You go to the Home Depot and spend $1,000 for supplies and materials for all properties. If you have separate bank accounts per property, each property's bank account should pay off the portion of that credit card expense that it relative to the property.
As a result, at year end, you can pull your bank statements to build a P&L rather than having to sift through credit card statements.
The key is to make sure that every transaction related to the properties somehow passes through that property's bank account. It doesn't have to be a hard expense transaction, it can simply be a transfer of money (i.e. paying off a credit card). But the idea is that at year end, you'll see that property A paid a $400 expense on your personal credit card via the money leaving property A's bank account.
You Can Use Personal Checking Accounts
I often get asked whether you have to use a business checking account. The answer is always no, unless you have an entity in place. When you utilize an entity, you do indeed need a business checking account.
This of course makes it super simple. Personal checking accounts are relatively easy to set up.
I'll do you one better. I use Capital One 360. It allows me to set up tons of savings accounts with the click of a button. I think there is a limit of 20 or so? I'm not quite sure.
So my property's transactions pass through savings accounts. It's phenomenal for organization purposes.
The point is, keep it simple. This is a simple accounting system and we don't need to overthink it.
This is a Simple Accounting System
Our first piece of real estate investment advice for literally every client is to make sure everything is documented. Without documentation, we cannot build tax strategies as we have no support.
Accounting systems are crucial to your success. If you can't trace the money, you'll never build the wealth you intend to. You'll never have the clarity you need to make financial decisions.
While this is not a sexy accounting system, utilizing separate bank accounts is indeed an accounting system. We are segregating your transactions into separate accounts to allow for easy tracking. Stick to it and you'll start to see how such a simple tweak can lead to positive swings in transparency.
Admittedly, this system is not scalable. We see clients scale out of this system when they have four or five properties. Once you get past that point, it's too much of a hassle to keep track of the transactions and different bank accounts. At that point, we look to automate the accounting system by moving to a cloud based solution such as QuickBooks Online or Xero.
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If you have questions about how to apply this to your specific situation or are looking for help, please reach out to us for more information and real estate investment advice!