How do you manage rental income into maintenance, capex, etc

Question

Account Closed · Answer

My husband and I had 40 rental properties that ranged from apartments to multi-families to single family homes.   We allowed $100.00 per unit and building for repairs.

Create an Escrow Account in your Chart of Accounts as an Other Current Liability Account and also make a sub account in your bank account called Escrow Repairs, and you will have a nice nest egg for those repairs.  (Treat it like you would your tenants Security Deposits)

Therefore just move $100 per unit and/or building to the Escrow Repair Sub bank account (by choosing it in QuickBooks) when  you deposit your income into your business bank account) and then link it o your Other Current Escrow Repair Other Current Liability Account.  (Also done in QuickBooks).  So your bank shows you with the total income, but QuickBooks will break it down for you by money in your bank, and how much of that money is in an Escrow Repair Account.

Some units don't need repairs at all, so that $100 is a part of the "nest egg" and will build up each month.  That's a good thing.

Some units or buildings may need a new roof, and that blows that little "nest egg".  However, the units that don't need repairs verses the units that need repairs, off set each other.  You are building a nest egg each month with units and buildings that don't need repairs, and having to dig into it when big repairs are needed. (But those big repairs don't happen all the time, and most definitely not every month, so you are basically saving more than you are spending).

Your profit and loss report by class will give you your total income, minus expenses, giving you a net balance of your worth for each unit and each building.

Making an Escrow Account as a sub account of your bank, will keep you from spending that money and is a way of physically keeping those funds from being spent. (Even though in your physical bank account it will show up)

Making it an Other Current Liability, shows QuickBooks that this money is allocated for repairs, or money to be paid out.

You will link those repairs to the right house or unit or building, (The class feature of QuickBooks) which will show up on your Profit and Loss Report.

Whew!  I hope I didn't make your eyes go glassy!   :)

Nancy Neville

Dalton Osmanski · Answer

I would suggest Quickbooks if you plan on doing the accounting/finance side yourself when you start to invest because you will be able to see all of your expenses that are occurring in your business and be able to plan better for the next deal. I would also suggest getting an LLC for every home you purchase and making a bank account for that specific property and defer from using the funds unless it is for that specific property that way your property's income is paying for all of the unforeseen costs you might incur as an investor.

Justin Owens · Answer

@Chatree C. It's up to you. You could keep it in one bank account but using a spreadsheet or accounting software like Quickbooks and divide it up from there. I get the desire to want to separate things but if you grow, do you really want multiple bank accounts per property?

I reinvest all cash flow so putting it all into one account works for me.

Antonio Figueroa · Answer

Starting off down the same thought trail.  I would like to know that I am:

1) saving enough for cap ex, maintenance and vacancy because all 3 happen and I want to minimize how much comes out of pocket

2) track what those numbers are so I know how much I can make sure I am leveraged efficiently (eg can I drop vacancy from 5% to 3%, do I have enough lined up to change a roof in X years, etc....)

So curious what did you end up doing?

Ben Raygor · Answer

What Nancy said makes sense.  Realistically, few small investors will do their bookkeeping that way.  But it's a good answer to your question about "the best way to book keep...".

In the earliest stages of bookkeeping, especially if you just use an excel spreadsheet, I would not create escrow liability accounts (although I think they could be a good idea when you get on Quickbooks and can automate the escrow account), but would would make sure to keep track of your estimated tax liability or estimated repairs/capital expenditures that are likely to happen during the year.

If the roof goes bad 7 years sooner than expected, and insurance doesn't help you out, your roof escrow account will probably run dry pretty quick and you will need to fork over cash out of your personal pocket.

To me, it seems like keeping a budget nearby (such as directly below your excel income statement) is going to serve the purpose you're needing.  For some people, a "budget" is just an estimate of likely expenses to happen this year.  For some people, setting a "budget" means they will not spend any more than xxx dollars on improvements that are not absolutely necessary and it's a hard line in the sand.

If you have an escrow account from January - September for a new furnace that will be replaced in November, your cash flow statement wouldn't actually take a hit until November.  An escrow account would tell you that a portion of the cash in your account is "designated" for a specific purpose - new furnace.  That's all.

Most early investors seem fine with keeping those capital expenditure amounts in their head or as a side note until they happen.  Some people estimate yearly cash flow by using a 10%-of-gross-income capital expenditure (or whatever percentage you pick).  When you get more properties, the system you put in place (creating an escrow account) will become more important and Quickbooks will be more valuable to you.  Following Nancy's advice then would make more sense for you.  As your cash account grows and you're tempted to take money out for yourself, you just always need to be asking yourself if you will have enough for repairs and cap exp, expected and unexpected.

How do you manage rental income into maintenance, capex, etc

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