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Why investors use separate bank accounts for rental property

Online banking on smartphone with businessman showing screen
by Jeff Rohde, posted in Investment Strategy

Owning a rental property is a business venture, and having a rental property bank account is a key part of investing in real estate. A bank account for a rental property can help to save valuable time and money, keep personal and business assets separate, and create the professional image that real estate investors look for.


Key takeaways

  • A rental property bank account keeps personal funds separate from business funds.
  • Key reasons for creating a rental property bank account include avoiding commingling, accurately tracking income and expenses, and reducing tax preparation fees.
  • Real estate investors may also choose to have two bank accounts per rental property, one for checking and one for savings.

 

Why investors use a rental property bank account

Beginning real estate investors often wonder if they really need a separate rental property bank account. The answer is a resounding yes!

Here are 7 reasons for setting up a bank account for a rental property:

1. Prevents commingling

Commingling occurs when personal funds are combined (or mingled) with business funds. 

For example, if Landlord Bob has a balance of $1,000 in his personal checking account and deposits Tenant Sally’s rent payment of $1,500 into the same account, Bob has commingled his money with Sally’s. 

While commingling may not always be illegal, many real estate investors view mixing funds belonging to one party with those of another as a bad business practice. Using a rental property bank account helps to prevent commingling in real estate by keeping business funds separate.

2. Helps protect personal assets

Having a rental property bank account may also help to protect an investor’s personal assets. Let’s say a landlord is involved in a lawsuit and the bank accounts are frozen pending a hearing before a judge. Even if the money in the bank account consists of a mixture of business and personal funds, all of the funds will likely be considered to be part of a business account. 

3. Creates a more professional image

Having a rental property bank account can also go a long way toward creating the professional image and credibility that real estate investors look for. 

Many real estate investors set up a limited liability company (LLC) for each rental property. After the LLC is created, the IRS will issue an EIN (Employer Identification Number) that most banks require to open a rental property bank account. 

Once the bank account is set up, investors make sure that funds flow in and out of the rental property bank account so that the rental property is operated like the business that it really is.

4. Simplifies income and expense tracking

Another benefit of having a rental property bank account is that it is much, much easier to keep track of income and expenses

Rather than having to review a bank statement each month and figure out which deposit and withdrawal goes where, investors save time and money and gain a better understanding of how much money is being made or lost on each property.

Free rental property software like Stessa even allows investors to link rental property bank accounts. Income and expenses are automatically tracked and recorded to the correct property and line item on the rental property chart of accounts in real time, with up-to-date rental income and net cash flow reports available with just one click.

5. Links business debit and credit cards

Ordering a debit and credit card linked to a rental property bank account also makes tracking income and expenses easier. Many investors carry the debit card with them at all times for purchasing materials or supplies, and link directly to the card for auto-paying recurring expenses like utilities or monthly tuition for real estate continuing education.

6. Establish local banking relationship

Some of the best markets for investing in a rental property are in small cities and towns where good business relationships can go a long way. For example, a local bank or credit union may see an investor is helping the community by providing much-needed rental housing. 

When an investor applies for a rental property HELOC (home equity line of credit) or is looking for a refinance, a local bank may be more willing to work with a business borrower instead of seeing money and business flow to another financial institution in a different state.

7. Save on tax preparation fees

According to the National Society of Accountants (NSA), the typical firm charges an average fee of over $1,200 to prepare the federal tax return for an LLC and an investor’s Form 1040. 

Of course, tax preparation fees vary based on a variety of factors such as the type and complexity of the return, where the rental property and investor are located, and how experienced the tax preparer is. 

An investor with a rental property bank account may be able to significantly reduce tax preparation fees by exporting tax-ready financials at the end of each year. The smart software from Stessa makes tax season a breeze with a personalized Stessa Tax Package, plus tax resources created in partnership with The Real Estate CPA and a TurboTax discount exclusively for registered Stessa investors.

Related: If you’re looking for a solution to streamline your portfolio finances, check out Stessa Cash Management. With Stessa Cash Management, real estate investors can automatically track income and expenses with an unlimited number of accounts, such as one for each property or portfolio of rental properties.

stessa cash management

As an added benefit, Stessa’s Cash Management deposit accounts currently earn a highly competitive APY (see table below for current APY across Stessa plans). Stessa Cash Management users can earn interest on balances from automated rent collection deposits, CapEx account, and operating account.

EssentialsManagePro
High yield Cash Management3.14% APY*3.14% APY*5.09% APY*
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How many bank accounts do rental property owners need?

The number of bank accounts needed depends on an investor’s unique situation. For many landlords, one rental property bank account may be sufficient, although some state landlord-tenant laws require owners to keep security deposits in an individual trust account.

A recent blog post by The Real Estate CPA, a certified public accounting firm that specializes in real estate investment, recommends investors set up a separate checking and savings account for each property.

The checking account is used to segregate income and expenses for each property. All revenues and expenses flow through the checking account, simplifying the task of generating an accurate income statement and Schedule E (Form 1040) at the end of the year.

A rental property savings account may be used for a couple of different purposes. 

As a general business practice, many real estate investors use a savings account to store funds for future capital expenditures (CapEx) such as a roof replacement or installing a new heating and cooling system. Landlords also use a savings account to store tenant security deposits, provided that the state or local municipality does not require a trust account specifically for security deposits.

 

Bank building

Tips for choosing a bank for a rental property account

Real estate investors often look for a bank that offers a variety of account options, reasonable fees and account terms, options for rental property financing, and a user-friendly online dashboard that’s easy to access at any time.

Some tips for choosing a bank for a rental property account include:

  • Direct rent deposit capability so that tenants can pay their monthly rent online, including online transfers and ACH (Automated Clearing House) deposits
  • Transaction fees that are reasonable and lower the cost of doing business with the bank
  • Minimum balance requirements that allow any monthly account fees to be waived
  • Online banking services such as desktop and mobile apps, viewing of check images, e-bills and notifications, and transfer of funds internally and to other outside banks
  • Loan products tailored to real estate investors, such as cash out refinancing or a rental property HELOC (home equity line of credit)
  • International banking to transfer funds to another country, a key consideration for remote real estate investors who live overseas

 

A rental property bank account simplifies real estate investing

It’s much easier to keep track of income and expenses when each rental property has a dedicated checking and savings account. A debit card and credit card can be linked to the business account, then used for tasks such as purchasing supplies and paying recurring monthly bills.

Automatically tracking income and expenses flowing through a rental property bank account in real-time helps investors to understand their current profit or loss, and makes tax preparation easier. Many rental property bank accounts allow an investor to categorize deposits and expenses according to Schedule E (Form 1040), such as rents received and operating expenses paid.

As mentioned before, if you’re looking for a solution to streamline your portfolio finances, check out Stessa Cash Management.

Stessa Cash Management integrates with Stessa rental property financial management software to provide a seamless, all-in-one money management service for real estate investors.

With Stessa Cash Management, real estate investors can automatically track income and expenses with an unlimited number of accounts, such as one for each property or portfolio of rental properties. Stessa is a fintech company, not a bank and banking services are provided by Blue Ridge Bank, N.A., member FDIC.

Stessa Cash Management provides the key features real estate investors are looking for:

  • Unlimited free sub-accounts (to organize finances by property, security deposits…etc)
  • No monthly maintenance fees
  • No minimum balance requirements
  • No inbound wire fees
  • Physical and virtual debit cards with unique account numbers for each property or portfolio to make recordkeeping easy
  • 1.1% cash back as of February 2024 (subject to change)
  • $5 wire send fee, with no wet signature needed
  • Integration with Stessa’s real-time insights and key financial reports

Learn more about Stessa Cash Management and sign up for a free Stessa account.

 

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