Should I Set Up a Bank Account for My Income Property? - Real Estate Investing
I have seen many investors run their expenses and income through their personal bank account, but this only makes their bookkeeping more difficult. You might not easily be able to tell what are business expenses versus personal expenses if they all operate out of one bank account.
Setting up your income property's own bank account (personal checking account) is crucial to staying organized with the income and expenses of the property. Thus, it is a good idea to ensure you have all rents and expenses set up to come through this account.
The Benefits of Having a Separate Bank Account for Rental Properties
Keeping your personal and business expenses separate is such a basic piece of advice but it carries a lot of weight. There are many benefits to creating a separate account, including saving money and time, as well as reducing stress when dealing with bookkeeping tasks. Let’s go over those benefits in more detail.
#1 Saving Money
Keeping your rental property expenses separate will help you save more money on taxes. When you subtract expenses from the revenues in your account, you’re left with your taxable income amount. The lower that amount is, the less you have to pay in taxes. Thus, if you remove your personal income and expenses from the rental property ones, you will be able to maximize the profit from your investment by reducing your tax burden.
#2 Saving Time
Money is not the only thing you can save just by separating your personal expenses from your rental expenses. If all of your revenues and expenses are mixed up in one account, it will take far more time to go through it and figure out which expenses were related to the rental property. This will only make your job more difficult since you will have no idea which expenses are deductible and which are not. By keeping separate accounts, you can make bookkeeping so much easier.
#3 Easier to Get Financial Help
It is common for income property investors to seek financial advice, especially if they are just starting out. However, if you don’t have a clear division between personal and business finances, the expert you invite to take a look at your numbers won’t be able to help you that much. That’s simply because mixed up finances can just lead to a bigger mess. Most bookkeepers and financial advisors prefer working with clients whose personal and business accounts are already separated.
#4 Protecting Your Finances
This one goes without saying but it is important to do everything you can to secure your financial assets. Having separate bank accounts means you will always have a plan B if something happens to your primary account. In the worst case scenario, let’s say you’re being sued and your account is frozen. That means you cannot access any of your funds. If you separated your accounts earlier, you would still be able to access one of your other accounts and get by until this issue gets resolved.
Automate Your Bank Account
In order to save time and to be more efficient, you should set up automations for the business bank account. Use direct withdrawal (PAD Forms filled out) from the income properties bank account to pay for the utility bills, property insurance and property tax so that you do not need to manually pay every single month. Instead, the money is withdrawn automatically.
If applicable: for those that have purchased this income property with a JV partner, you can tell the bank that this is a joint account, and they will have you and your JV partner sign a document agreeing to both have equal access to the account.