This is all very well and good, but for me the key to success in real estate investment is not how many houses you buy, but how quickly you manage them. A key element of efficient real property management is not your houses, but how the financial structure of your bank account works behind the scenes. Disorganized banking leads to Accounting nightmares, a mess with your funds and property management bank account structure, a great waste of money. On the other hand a strategically structured banking structure in real property management is the foundation on which new growth, scale and profitability are built. What sets this course apart from the amateur/hobbyist investor and the serious investor is this.
The Perils of a Single Account Approach
Until recently many first-time investors essentially drained all the money and expenses from their real property management account into the same checking account their personal bank account kept on hand. It sounds very simple, but it in fact involves one of the most significant holes in your financial picture. First, it is virtually impossible to see clearly how successful each individual property has been in terms of cash flow. Does its cash flow look good? And Baselane is the most checking/savings account will make it much more difficult to answer these questions. Secondly, by moving money into the personal checking account your legal identity is obscured. If you file a lawsuit against your investments, a creditor may have the opportunity to pull funds out of your commingled checking account, putting your personal assets at risk. Thirdly, during tax time, when you file your taxes, you risk having to go through hundreds of transactions from your real property management bank account to try to categorize every expense that is deductible. If you do this all the way through the year, you could face serious tax implications.
The Core Foundation the Three Essential Account System
To achieve clarity, safety, and efficiency in your real property management finance, it is recommended that you establish a system of three bank accounts. The triad functions as a solid foundation to help ensure your bank accounts flow efficiently. It also helps streamline the organization of finances and maintain fiscal discipline. Real property management bank account structure is mandatory for all investors with at least one unit. And it is also recommended as a best practice if you only have one unit in your portfolio. The three accounts are: Operating Account, Reserve Account, and Security Deposit Account. Each has a specific and essential purpose, combined together for the ultimate in financial peace of mind. Establishing this structured arrangement is the single most important step you can take to elevate the professionalism of your property management company.
Account One Operating Account the Central Hub for Cash Flow
Operating Account Management the Operating Account is the foundation of your business activities. It is the account that deposits all of the monthly tenant rents. On the other hand, all recurring and day-to-day expenses are paid from this account as well, such as mortgage payment, property taxes, insurance premiums, routine maintenance, and utility bills if the property owner pays them and management fees. By taking all transactional activity off of this single account, you can see exactly what you’re working with respect to your cash flow. This makes it very easy to calculate net operating income per month with this simple procedure in mind. Operating Account Management If you must use this account for any other purposes, then you’ll need to restrict your access, and only use it to act operationally, that is, keep the balance of the Operating Account accurate and an overall representation of the true liquid financial condition of the rental property.
Account Two the Reserve Account Your Financial Safety Net
The Reserve Account, often called a capital expenditure Cape or savings account, is your proactive defense against these inevitable financial surprises. This account is funded by a predetermined percentage of the monthly rental income, typically between 5-10%, transferred directly from the Operating Account. The purpose of this account is not for daily operations but to accumulate funds for large, infrequent repairs and capital improvements. By consistently funding this reserve, you ensure that when a $5,000 HVAC system fails, you can cover the cost without resorting to high-interest credit cards or dipping into personal savings. This foresight transforms potential financial crises into manageable, planned expenses, a key benefit of a robust real property management bank account structure.
Scaling the Structure Multi Property and LLC Considerations
Now that your portfolio has grown from one property to more units in the portfolio, that’s a big change for your banking structure. If you run multiple properties in the portfolio there is one way for you to keep a master set of all three main accounts in your bank bank account. This makes it pretty easy for you to manage the portfolio, but it also keeps you from having the same things that we call “fund separation”. You could run the portfolio separately under a separate legal entity.
For example, if you run the portfolio in multiple Limited Liability Companies (LLCs), you would want to run the same bank structure, but in each LLC the Operating/Reserve/Security Deposit accounts would be dedicated to each LLC. Now this is quite the challenge to run, and certainly some of it could be incredibly tedious, but trust me, this is the true definition of making everything so complicated.
Leveraging Modern Technology for Seamless Management
From day one, manually maintaining this multi-account structure, monitoring transfers and reconciling transactions can become too much of a hassle. And this is where modern property management technology comes in. A platform like Baselane was developed with the goal of supporting and automating your perfect bank account structure. When you don’t deal with multiple logins from various banks, such a platform can connect all of your accounts to a single, intuitive dashboard. And more importantly, it can automate the very core of the system, say, automatically using a set percentage of the rent you receive in your Reserve Account or conveniently reconciling transactions with the right property.
Conclusion
An orderly and systematic structure for your bank accounts is not only a necessary part of an overall corporate organization, but it is also a critical decision to make. There is no better way to visualize and categorize the funding provided by a distinct Operating, Reserve, and Security Deposit account arrangement, with zero likelihood of confusion, minimizing legal and financial risk, and providing stability to allow you to scale your investment portfolio. By embracing this disciplined reality and using Baselane technology to automate this arrangement, you free up the most precious resource: your time and your mental energy. So instead of spending all of your time trying to figure out what’s going on with your finances, we can devote our undivided attention to growing your real estate empire, ensuring your financial future, and reaching long-term property management success.
