Financial arrangement for Real Estate investing

[Yichu Zhou]

Hi, everyone,

I am new to real estate investing and plan to start investing this year. I have been reading many books (and posts in this forum) and trying to build a system for investing. Before posting my questions, I would like to briefly introduce my current situation. I currently have two rental properties, but they are not "on purpose." I acquired them not for investing, but they ended up as investments due to some life changes. Anyway, these two are in different states and are handled by property management companies. 

Now, I have decided to be a real estate investor. To start with that, I have some financial arrangement questions:

1. One of the books I have read suggests that I should use a separate banking account to handle all the income and expenses for one rental property, even if I do not use an LLC. This makes the bookkeeping easier to handle. My two property management companies provide me with monthly statements listing all the income and expenses. I feel this is enough for bookkeeping. Currently, I am using my personal checking account to collect rentals. Are there potential issues using my personal checking accounts except for the bookkeeping?

2. Every year, my CPA prepares my tax returns. My property management company sends me the 1099MISC form, and I send it to my CPA. That's all I did. I feel this is not a best practice, but I'm not sure how to improve it. Can anyone give me some advice on organizing my system? I really appreciate it. 

Still learning things here. Any suggestion is appreciated! Thanks!

[William Sing]

Hi @Yichu Zhou,

Welcome to the exciting journey of real estate investing! It’s great that you’re taking proactive steps to build a solid foundation for your investment strategy. Based on your questions, here are some insights that might help streamline your financial arrangements and improve your system:

1. Separate Banking Accounts for Each Property Using a separate banking account for each rental property is indeed a good practice. It simplifies bookkeeping and ensures clear separation between personal and rental property finances. While your property management companies provide monthly statements, having a dedicated account will make it easier to track transactions, verify statements, and manage cash flow. This also reduces the risk of mingling funds, which is important for both clarity and legal reasons, especially if you decide to form an LLC in the future.

Potential Issues with Personal Checking Accounts:

• Audits: Using personal accounts can complicate things during audits. Clear separation helps demonstrate that rental properties are business activities.
• Bookkeeping Accuracy: It’s easier to reconcile and categorize expenses when they’re all in one place, reducing the chance of missing deductible expenses.
• Professionalism: Separate accounts show a more professional approach to managing rental properties, which can be beneficial if you seek financing or partnerships.

2. Organizing Your Financial System You’re on the right track with your CPA handling your tax returns and receiving 1099-MISC forms from your property managers. Here are some steps to improve your system:

• Automate and Centralize Records: Use property management software like Buildium, Stessa, or Innago. These platforms can integrate with your bank accounts, track income and expenses, and generate reports, simplifying your record-keeping.
• Regular Financial Reviews: Schedule monthly or quarterly reviews of your finances to ensure everything is in order. This helps catch any discrepancies early and keeps you informed about your properties' performance.
• Budgeting and Forecasting: Create a budget for each property, including expected income, expenses, and reserves for maintenance or vacancies. This helps in planning and ensures you’re prepared for unexpected costs.
• Consult with Your CPA Regularly: Have periodic check-ins with your CPA to review your financial strategy, tax planning, and any changes in tax laws that might affect your investments. This proactive approach can optimize your tax situation and ensure compliance.

Starting with these steps can create a strong, organized system for your real estate investments. If you have more questions or need specific advice, feel free to ask. Best of luck with your investing journey!

Cheers,