Cash flow on a rental property

[Justin Cox]

Hi everyone. I have a questions about cash flow of rental properties. So I’ve been reading about all of the expenses I should be taking out of the rent I receive to determine my pure cash flow. Mortgage, taxes, insurance, vacancies, repairs, capital expenditures, etc… 

But where do you put the money for all these expenses? Just curious what everyone is doing. Do you put each expense in an envelope? Do you lump it all together in a bank account? I’m just wondering how you keep each expense separate from one another and how you stay organized. Thanks for the help in advance!

[Nathan Gesner]

You need two accounts: checking and savings. If the properties are split into more than one LLC, then each LLC will need its own accounts.

Checking: collect all income here, then use it to pay bills. Pay the mortgage. Pay for maintenance. If you are setting aside funds for capex, taxes, insurance, or other expenses that don't occur monthly, transfer those funds to Savings each month and hold them there until it's time to spend them. You will receive the security deposit in Checking but then transfer it to Savings.

Savings: Hold the deposit here so it's separate from operating funds. You can also hold money for maintenance, capex, taxes, insurance, or other projected expenses. When a tenant moves out, transfer the deposit back to Checking so it's ready to apply towards expenses or to refund to the Tenant.

If you end up with excess funds in the Checking account, I recommend you transfer it to a third account that is specifically designated for future investments. That ensures you don't spend it on other things and that you know exactly how much you have available to spend on the next purchase. If it's mixed in with your deposits and reserve funds, you may accidentally spend money you shouldn't have.