Over 82% of businesses fail due to financial mismanagement, which includes failing to have dedicated bank accounts to separate personal and business finances. In addition to saving your rental income, a bank account protects against liability, enhances bookkeeping and accounting, boosts your professional image and compliance, and streamlines budgeting and reporting.
All good things, but if you’re new to the industry, you may feel overwhelmed as to where to start. In this article we’re going to cover a few key topics that you should know before you begin opening bank accounts for your rental business.
Potential Issues and Considerations
Getting into real estate is exciting and rewarding. However, there is a certain element of risk in every investment. While those risks can be found throughout from securing a line of credit to understanding how to set up your banking situation to maintain cash flow for the rental to finding a solid tenant to rent the property, for this article, we are going to focus on what you should know when it comes up to setting up bank accounts for your rental portfolio.
What Types of Bank Accounts Are Available for New Landlords?
Effective rental income management begins with choosing the proper bank account, depending on your unique needs and the features you need.
- Checking accounts – ideal for daily transactions, including receiving rental income, paying bills, and writing checks
- Savings accounts – ideal for accumulating your rental income to earn interest or for future or emergency expenses, such as repairs or renovations.
- Business checking accounts – designed for businesses, such as LLCs or corporations, with more features tailored for business transactions.
- Escrow account – holds security deposits in a neutral location to avail to tenants when they move out.
If you’re accepting rent through a Property Management Software, you may be limited in the type of bank account that you may set up to deliver funds directly into. Make sure to keep that in mind as you do your research.
Consolidating Accounts vs. Multiple Banks
Beyond personal needs and preferences, financial, legal, tenant, and property risks play a vital role in deciding whether to consolidate or have multiple accounts.
Consolidating your accounts involves combining all your different bank accounts into one central account with a single bank or a financial institution. Depending on your portfolio set up, you may choose to move your money from multiple accounts into one account for easier and more convenient management and organization.
Account consolidation may help build a strong relationship with that bank, earning you certain high-tier account perks, such as better interest rates. It can also provide added monitoring and detection of fraudulent activities, such as unauthorized transactions in your account.
On the other hand, multiple bank accounts offer more flexibility, control, and effective risk mitigation.
When Is It Ideal to Open Multiple Bank Accounts?
The daunting tasks of managing multiple bank accounts might make you complacent with a single account. Unfortunately, a single account can be more burdensome, especially for multiple rental properties.
Opening multiple bank accounts for your rental portfolio is ideal when:
- Expanding your property portfolio
- Complying with industry regulations
- Mitigating risks of financial loss by spreading funds across various bank accounts
- Enhancing financial management with better visibility and control
- Simplifying bookkeeping and financial reporting
- Ensuring each property’s financial records are current and accurate
- Effectively managing your tenants’ security deposits
- Setting clear financial boundaries
- Separating your personal and business finances
Risks of Having a Single Bank Account for Multiple Properties
A single bank account for multiple properties sounds like a convenient idea. In reality, it can lead to the following challenges and risks for landlords:
- Poor financial management, including commingling of funds and inefficient bookkeeping, accounting, auditing, cash flow, and budgeting
- Increased risk of fraud, theft, and liability
- Non-compliance with local regulations
- Risk of overdrawing funds, potentially jeopardizing the other properties’ financial stability
Additionally, if you requite a security deposit (as many landlords do), there are regulations surrounding where to hold that specific deposit.
Understanding How to Handle Security Deposits
A security deposit is a specified deposit a tenant pays you at the start of a tenancy before they move into your property. These funds may protect you against unpaid rent and property damages.
There’s no standard deposit amount. It depends on your state’s and local jurisdiction’s laws and property type.
These laws also mandate you handle security deposits responsibly, fairly, and legally. Here are a few tips on how to do that:
- Provide a receipt for the deposit showing the amount paid, the date you collected, and why you’re holding it
- Hold the security deposit in an FDIC-insured separate account or escrow to avoid commingling funds
- Return the security deposit promptly at the end of the tenancy after deducting any unpaid rent or damages to the property
- Provide the tenant with an itemized list of any deductions and receipts for any repairs or cleaning
Familiarize yourself with local security deposit laws to reduce liability, hefty fines, and any other legal repercussions of non-compliance.
Banking Practices for Different Business Types
While partnerships often involve joint bank accounts, you can also open separate accounts. A corporate account might be ideal if the partnership is incorporated, as it protects you against liability.
Sole proprietorships often involve personal bank accounts that landlords use for personal and business transactions.
Corporations usually have complex financial governance practices. They typically have corporate accounts to protect the owners against liability.
Business bank accounts are ideal for LLCs to protect against liability. If you solely own the LLC, you can open a personal account but forego the liability protection. You can also choose a corporate bank account if you’ve incorporated your LLC to enjoy added liability protection than the business account.
Accepting Rent
Once you’ve chosen the best account(s) to use for your business, you’ll need a way to accept rent. There are a few ways that most landlords will do that:
- Physical Checks
- ACH
- Credit Cards
- Debit Cards
For the latter three, you’ll need to use a payment service to process those payments.
What Kind of Limitations to Expect from Payment Services
Rent payment services are third-party platforms or apps that provide online tenant rent payment solutions.
These platforms are convenient and secure. You will be able to automate reminders and payments, track the process, and view the payment history from a single platform.
While they streamline the rent payment process, they may present several limitations:
- Costly service fees for each rent payment
- Potential learning curve and/or difficult onboarding
- May have limited features and payment methods
- Possible lengthy delays to receive funds
- My only allow funds to be deposited into a single bank account
It’s always best to weigh the pros and cons. So let’s take a look at how you can find a payment platform that works for you.
How to Bypass Those Limitations
Prisma offers a comprehensive online rent payment option as one of the many features available on the platform. Here are just a few ways that we help you bypass the limitations noted above:
- One of the lowest Technology Fees in the industry and the ability to have the tenant pay rather than the landlord
- Quick landlord onboarding with an easy-to-use platform
- Ability to accept rent via ACH, Credit Card, or Debit Card. The landlord also has the ability to choose what they would like to accept
- Two business day ACH transfers and nightly batching for Credit and Debit Cards
- Add multiple bank accounts to streamline your deposits
And all of that is accessible from a Free Membership, which is great for a landlord on a tight budget!
In Conclusion
Opening a bank account – or multiple – is vital for effective financial and rental property management. Understanding the various types of bank accounts and other bank practices will help you separate your personal and business finances, regardless of the type of rental business.
Make sure that you do your research, speak to multiple banks to get the best interest rates, and choose a property management software that makes your life easier. If you have any questions on how Prisma can do that for you, let us know today!
