Do I need a separate bank account for my rental property?
In one word: yes! Keeping your personal and rental property bank accounts separate is our #1 piece of advice for real estate investors and landlords. Below we take a deeper dive into why this one basic step is so central to keeping better books and running a better real estate business. From saving you money and time to reducing your risk, separating your personal and business finances is the foundation of easier, stress free real estate accounting and bookkeeping.
Separate bank accounts 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 expenses from the revenues and you are left with your taxable income. 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 paying 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 sorting through one single bank account that includes both personal and business spending or starting from 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 help you save time
Beyond the monetary impact of recording all expenses and maximizing your deductions, 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? For many landlords, 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, prevents confusion, and saves you time.
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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 who assists with your tax filings, 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 co-mingled 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 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 help 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 help you to scale
Everything written above is true if you have one or two 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 complexity (like with a short term rental or a multi-family property) you will inevitably have many more transactions to manage. More transactions magnify 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 for my rental properties?
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 many 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.
If your portfolio has grown to include multiple legal entities, you should have at least one account for each legal entity you hold property in, as each entity is itself a separate business that has its own assets, liabilities, revenues, and expenses. 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!
Security deposits are another situation that may warrant additional accounts. Some landlords are required to hold deposits in a separate account, but laws can vary by state and locality, so make sure to be aware of any specific requirements for holding security deposits that may apply to you.
Beyond that is a matter of personal preference. Some rental property owners like to keep an account per property. This can make categorization easier as long as you maintain good discipline with using the correct card or check for each expense incurred. However, maintaining more accounts can get cumbersome if your properties share service providers or if you frequently need to transfer money between accounts to cover unexpected expenses. You should think about your cash reserves and monthly transactions to decide how many accounts will work best for you.
Conclusion: separate bank accounts are the foundation for successful rental bookkeeping
There are 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.
Last updated: May 9, 2022
