As a vacation property landlord, you may not actually be running your rentals strictly as a business. If you were, a strict business would be incorporated and have its own financial accounts and management separate from your personal finances. You might even file separate tax returns. In reality, most landlords mix their property finances with their personal finances.
Unless you are actually running your rentals as a business, there usually isn’t a need to go through the trouble of setting up a company. However, it is still a good practice to separate the finances of your rental properties from your personal finances. When you do this, it makes the management and accounting easier to organize. In this article, we talk about a strategy to use with your bank accounts to get you started in better expense management.
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Expenses – The Pain of It All
Expense management is one of the hardiest and tedious tasks in managing properties. The reason is that expenses can come from anywhere such as:
- Cash on the street.
- Paper checks your write.
- Expenses embedded in your personal credit card bill.
- Bank bill payment service.
- Debit card payment.
- Hand written receipts
- Car toll bills
- Some portion/all of your home improvement receipt.
- Givebacks/incidental expenses tied to guest stays.
- It goes on and on and on….
There is no single solution or secret to managing this, the reality is that you will likely need to use a patchwork of software and good organization practices. However, part of your solution can be to use software tools where they make sense. The more you automate the less likely it is that you will miss expenses.
How Your Bank Can Help You
The best place to start with managing expenses is with your bank account or credit union. These institutions have lots of technology that you can use to manage and automate you financial transactions. Use it! Here is a model of what your accounts could look like.
Step 1: Create Separate Accounts
First, create separate accounts for your rental activity. The accounts are checking account and a credit card as a minimum. It may sound so simple, but I will admit that when I started out renting properties, I didn’t do this.
There is a big benefit to doing this step. When you do this you are naturally segregating your rental activity. As a result, all your transactions will be relevant and there will be no need to select or segregate individual transactions or charges. When you need to gather your expenses for your taxes it will be a breeze.
Also, make sure that you request a “bill payment” service for your checking account if you don’t already have one.
Step 2: Create Bill Payment Categories
The next step is to create organized bill payment categories. These categories will be used to group relevant expenses by both individual properties and by IRS tax category. In this way, the expenses will then really organize themselves because you have set them up upfront. The table below lists all IRS tax categories that are relevant for rental activity.
| IRS Expense Category | Typical Expenses Reported |
|---|---|
| Advertising | Payments to promote your site (Google ads, online listing, etc) |
| Cleaning and maintenance | Payments to clean property, weed control, leaf pickup, power wash deck, etc. |
| Insurance | Property insurance, including fire/liability/flood. |
| Legal and other professional fees | Legal expenses, such as title search, variance application, other legal issues. |
| Management fees | If you pay a third party manager to handle your property rentals, this is their fees. |
| Mortgage interest | Interest on the property mortgage paid, if applicable. |
| Repairs | Fixes to property that are not major improvements. |
| Supplies | Any supplies used for your rentals: towels, soap, garbage bags, etc. |
| Taxes | Taxes, typically property taxes or other assessments on the property. |
| Utilities | Water, electric, WIFI, and the like. |
Not all of these expense categories will be relevant, so pick out the ones where you think you will make payments. Next create bill payment categories. Another great tip is to create individual bill payment categories for each property. The table below provides a sample setup that works for 3 different rental properties.
| Expense Category | Relevant Expenses |
|---|---|
| Maple_utilities | Utility expenses (cable bill, electric bill, water bill) for the Maple avenue property |
| Maple_cleaning | Cleaning expenses (changeover cleaning, leaf pickup) for the Maple Avenue property |
| Oak_utilities | Utility expenses (cable bill, electric bill, water bill) for the Oak Street property |
| Oak_cleaning | Cleaning expenses (changeover cleaning, leaf pickup) for the Oak Street property |
| Central_Unit1_utilities | Utility expenses (cable bill, electric bill, water bill) for the Central Avenue property, Unit #1 |
When you add payees to your bill payment service, you would then need to specify the right payment category that applies for the expense and property.
Step 3: Fund Your Accounts
The new accounts you created need a source of funds. The easiest way to fund these accounts is to make transfers from your other accounts. These could include a savings account where you collect your rents, your personal savings or checking account from another bank.
It may be necessary to do this because your collection of rents may not sync nicely with your expenses. In my own experience, rents tend to come in either bunches or spread out inconsistently. In order to keep enough money in the checking account for expenses, I setup an automated transfer each month to pay estimated monthly expenses.
It is very likely you can do this at your bank or credit union. This is what the screen looks like below where I bank.
Step 4: Setup Alerts/Notifications
Banks and credit unions will usually provide the ability to setup alerts and notifications. These notifications are very powerful. they can help you to potential track fraud by tracking unusual transactions among other uses. However, the benefit when it comes to your expense management is to help you prevent a low balance account. When you account balance gets too low, your bills cannot be paid on time. This is especially useful if your expense accounts do not have a self funding source, such as your rents.
Alerts can be sent to either your email account or as a text to your phone. Here is a sample setup page from my bank.
Step 4: Setup Over Flow Account
This step is not strictly necessary but can be a useful tool. Essentially what you can do is setup a separate savings account or credit account at your bank that is used as an overflow account. This overflow account would be tapped if a payment is made from expense checking account that cannot be filled due to a low balance. This provides an extra measure of assurance to insure your bills get paid.
This account could be a higher interest savings account or a special line of credit. In the cases where I have set this up, this required a visit to the bank.
Adding It All Up
Once you have completed all the setup and have made your payments you are now ready to download and use the information. It is easy to export all your transactions by using your banks export facility. The available options are pretty typical and standard. Use the one that works in your situations.
If you use QuickBooks or Quicken (or other software package), the transactions can be formatted for direct input. If you manage your expenses outside a package, Excel is the appropriate option to use.
What If You Don’t Want Separate Accounts?
It very well could be that you don’t want to go to the trouble of creating separate accounts at your banking institution. Perhaps you only manage one rental property and don’t believe its worth the trouble.
To make this work, you can utilize the tips offered in Step 2 above that will enable you to isolate expenses. These payments could still be made in your personal accounts but they will be segregated by payment category. This wil still help you down the line when you need to manage them.
