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In this episode, we cover how to set up your accounts to easily track your expenses and simplify your tax process. --- Transcript   Emil: Hey everyone, welcome back for another episode of The Remote Real Estate Investor. My name is Emil Shour and today I'm joined by my co hosts,   Tom: Tom Schneider,   Michael: and Michael Albaum.   Emil: And today we're gonna be tackling getting your financial house in order. So a friend of mine hit me up on Twitter asking for accounting best practices. So we're gonna read his question and start tackling it piece by piece to show you how we do our accounting and keep everything in order. So let's hop into this episode.   Emil: Alright guys, so I'm going to read Alvin's message to me and then we'll start tackling it.   So, hey Emil, fan of the pod think y'all are doing some awesome work there. Thanks, Alvin. One potential topic to consider for an upcoming podcast is accounting best practices. I'm just getting started with my first property in one area that I'm wrapping my head around is how to best set up bank accounts, like operations, reserves, etc. credit cards, all those things. So I'm not dealing with a tax nightmare next April. Thanks for considering and keep up the awesome work.   All right, Alvin, this is a great question. I think we, I think we covered it inside of an AMA. But we wanted to break it out and dedicate its own episode, because it's definitely a good topic and something to think about, especially as you're you're just getting started. So do you guys either one of you guys want to start just mentioned how you set up your financial accounts, either checking savings, things like that   Tom: I’ll lead the way, so I probably have a super simple structure. So I have one separate bank account that I took out through one of the big banks and with that account, I to connect my mortgage payments to it. So I do an automatic withdrawal to pay that within the mortgage accounts themselves, I will have an escrow in there where they'll take out a little bit extra every month to manage my taxes and insurance. So I don't have to worry about that throughout the year. But if I want to be more proactive and not let them have my float of escrow account, I could pay that you know when it's due, but I like the past 70 of just setting up that impound account.   So you know, checking account automatic payments in and out to the mortgage and kind of a similar structure with my individual property managers where I have my bank account connected with my property manager, and they hold a little impound account where with each property that they manage for me, depending on how many that property manager manages, they'll keep a couple extra couple $100 if any maintenance or issues come up, and I set up with them a not to exceed limit. So if the price of any work that they're going to do is over 200 bucks, I want to know about it. If not I trust my property managers with most of them. I've been using them for over a year. So I feel okay about them making decisions on some smaller stuff.   You know, I never thought about until this episode that with both of these sort of key partners that I have I let them both have a little bit of an impound account. So I have, you know, my main checking account where funds are coming in funds are going out. And then both with a lender as well as with the property manager, they both have little escrow accounts to manage the stuff that they have to pay via insurance or taxes or any maintenance stuff.   Beyond that I don't have a credit card that I use for any real estate stuff that I do the most of the transaction that I'm making. Personally, you know, outside of the initial acquisition and end and downpayment in acquiring the property, there isn't really a lot of transactions that I make that would be manual, everything is is pretty automatic set and forget it, you know, monthly money in pumping money out and then these two little separate escrow.   Emil: It's basically what is your financial house look like? Do you have a separate checking account? Good mention of like the the impounds with property manager and lender, which is very common, it's nothing unusual. So yeah.   Tom: And I heard the question before within Academy members asking, Hey, do you set up a different checking account for every single property if you have multiple LLC? Sure, do it for each LLC. But for me, I don't get a unique checking account for each property. And also, what I love about that as having a separate checking account for my rental properties is I know that money's in that bank account, I'm not taking it out. And it gives me a really good finger on the pulse on where cash flow is going month over month as funds are going out and funds are coming in. So I like that canary in the coal mine of the checking account balance level that I just look at pretty regularly.   Michael: That’s great.   Emil: On the same note, I have a chase personal checking account. And when I started, I created another checking account that all of my rent goes to any expenses come out of so it's just completely separate from my personal. I just use chase because I had them with my personal banking and I manage it the same way. Just keep them separate all properties go into this one checking account, nothing fancy no credit card or anything like that so far.   Michael: Sweet, nice, simple clean. So I started very similarly to you both just having a separate checking account and then I had two properties that both went into that account. And then again, just like I mentioned, I kept it very separate, very unco mingled. And then I add my third property purchase. I started an LLC and so I moved everything over to an LLC account. And so then I need to open up a new LLC bank account. And have everything flow through, they're still keeping it totally separate, no commingling and so everything just got paid out of that account. Really the only difference in operation was that it had a different name. And it was a business checking account rather than a personal checking account with the name of the LLC. But from an operational standpoint, it was still handled in the same fashion to was handling it previously.   And it wasn't until this past year, because I've opened up several more LLCs over the years, as I've purchased new acquisitions in different parts of the country. And so this most recent year, I've been working on this massive rehab and my contractor started accepting credit card payments. So I just applied for a business credit card this year got approved and got that and that's been awesome, because it's money you're spending anyhow. So this has a 0% interest for like the first 12 months so I can carry a balance on it if need be. The problem is that it's a super low balance, and I'm constantly paying for rehab. So for that purposes only make a lot of sense. But there's cashback incentive, which is nice, because again, it's money I'd be spending anyhow. So it's kind of a nice perk.   But Tom, kind of like you mentioned, there's not outside of that rehab and…   Tom: Getting some airline miles there?   Michael: Yeah, that's it. I mean, I get…   Tom: Cashback, at restaurants, Starwood Hotels?   Michael: That's, that's right, we get my Marriott points...   So yeah, so outside of that, you know, there's really nothing I put on credit cards for the business or the LLC expense. Most of that stuff, I could pay directly added that the debit account, by property taxes and insurance, I could set up to be pulled directly from that account, all the mortgage stuff went directly from that account, it was very little that I would need to be spending on a credit card anyhow, so it just didn't seem worth it to have the extra overhead or extra tracking to have a credit card for each LLC. So I only have one for one of my LLC.   And then as far as tracking the expenses. I think that was part of Alvin's question too. I personally, I just use Excel, I have an Excel sheet. And I think we've talked about it in a prior episode, like you're mentioning me on one of the other ama is where I just have it broken down by LLC at the top, whatever LLC it is, and then all the different properties within that LLC. And whatever the expenses are associated with that LLC. I track the date, what the payment was, what the expense was, and then how much I paid. And then I sum everything up at the property level and the LLC level. And then I just send that file to my accountant at the end of the year.   And there's not a whole lot that actually has to go into that because like I was mentioning, I pay my property taxes separately, I don't have them impounded. And so for a lot of my stuff for some I do for most I don't so I don't impound my taxes, I pay it off separately, I pay my insurance separately, and then any kind of rehab stuff that I have to pay that gets all tracked on that sheet.   So at the end of the year, I see okay, how much did I pay for this property outside of what the property manager paid, because the property manager gives me a summation, a year end profit and loss statement that shows Okay, you paid this much in management fees as much in repair and maintenance this much in whatever snow removal. And so I just said everything to my CPA, and he's like, great, here's your tax return   Emil: Perfect. And some property managers will like literally pay all of your bills for you. So it's tracked in this system that Michael mentioned, in St. Louis, I own a single family home. And St. Louis is weird in that they split the water bill from the sewer bill. And so the water bill is under the tenant, but the sewer bill goes to me and I have a property manager who will take over all my bills, so I can tell them to be the name on the sewer bill, they pay it directly right out of the rent. And then I get my profit and loss like Michael mentioned right out of their system, because they handle accounting much better. And I don't have to like, you know, think about how much I pay and sewer bill times 12 track that in Excel blah, blah, blah. So that's another option you have is talking to your pm seeing if they can take over your bills.   I guess if you didn't do this proactively, what would you do? Maybe print out your checking account for the entire year, look at all the money going out and maybe say like which property it was assigned to and what it was for? I think that's maybe like, but that's kind of the nightmare that Alvin was talking about that you probably don't want to do.   Michael: Yeah, that becomes a pretty big lift, especially trying to keep track of like what the expense was and on which property? Because you definitely I've been told what to keep everything on like a per property basis. And so like whatever expense associated with property a key with property a and so if you've got everything in a single account and aren't tracking it, that becomes Oh, where was that $57 expense, which property was that for? becomes pretty, pretty confusing pretty quickly.   Emil: An awesome tool I want to shout out here that can help people not have to do what Michaels doing in Excel.   Michael: If you want to be way smarter than me,     Emil: I need to do it too. Because I haven't been doing a good job of this, I need to go sign up for is Stessa great tool. It's like the QuickBooks for your rental property. It'll see all the you know, you'll tie it to your checking account. It works with all the major banks tie it to your checking account, it'll look at each thing coming in and going out and you can just assign those to a specific property and a specific expense. I can say this is the St. Louis property and its sewer bill right and then it's all tracked. At the end of the year I get a nice easy export that I can send to my accountant. So definitely check out Stessa if you want to make this make your expense tracking much easier.   Tom: I use Stessa, I like it the document it's like simple but just effective and we've talked about it For the podcasts and documents, storage, you can connect your bank account to it as well. But it's a very cool tool.   Emil: Absolutely. Another part of Alvin's question, which I think is is really interesting. And I want us to tackle a little bit harder, you'll see a lot more different stuff is in terms of reserves. So I'm curious, do you guys you know, a lot of times you look at a pro forma, or how a property expenses and everything should look like and you'll see an item for cap x or things like this, like money, you're gonna put aside for major repairs. And I'm curious if you guys like, actually on each rent check that comes in? Do you take a amount or a percentage or whatever, move it to a different checking account? Or how do you guys handle your reserves.   Tom: I know that I have this pool of money within this checking account once they're coming in. And I already know that I have these escrow accounts I talked about before that the property managers are holding based on the number of properties in the portfolio. So I'm not doing any extra work, once the funds are coming in and moving them to a separate bank account, I'm getting that fool of the main bank out is as fat and happy as it can and then use it to reproduce to make a new property to feed the beast.   So you know, I know roughly how much money I want to have in that general funds. And once I get to the point where I can acquire another property all take money out of that pool, buy another property and just plug that into the system and then let it run. So I'm not moving on a monthly basis. Now I'm not moving moving into any separate checking accounts.   Michael: It was the same for me when I was first starting out, and I didn't touch any of that money, like what would be cash flow. And I just left everything in the same checking account. But what I did do is as I started to want to use that money for things other than just investing, I like open that faucet a little bit. And so I based on my pro forma and based on past history, I would say okay, well, I made about 200 bucks a month cash flow per property. So if I had three properties and call it 600 bucks a month, so I would just set up an auto transfer for like 400 bucks from my property checking account into my personal checking account. And so that was like my portion, that was my cash flow. So everything else stayed in the account. So the reserves, everything else that wasn't cash flow just stayed in that account. And so whenever I needed to do something, I would just dip into that account and pay for whatever capex item was needed.   But I was starting to feel the effects of the cash flow. But I just made it a smaller amount than I had anticipated for it in case I made a mistake somewhere. And at the end of the year, if there was a ton of money leftover in the account, I could square up with myself, so to speak, and give myself an extra pay.   Emil: Solid.   Michael: How do you handle it Emil?   Tom: Putting it all in GameStop Emil?   Emil: I take all my money and I put it in whatever Wall Street bets tells me to know what I what I did is when I first started, I basically have a minimum balance that I keep based on unit count. So when I bought my first property, I think I put $3,000 in this account, where did I come up with that number, I don't know, I just kind of arbitrary, it was like a 3000 that should cover any like minor expense. And if I have anything big, I'll figure it out.   As I bought subsequent properties, I just made sure that minimum went up higher and higher. And basically anything above that minimum, I would like you Tom, that's just funds to go help with the next acquisition, right. So if I say my minimum is 10 K, and I have 17 k in that account, I know that seven k delta I can go use when I go buy another property or whatever, or that's available to me to for acquisitions.   So that's kind of my strategy right now I don't set it aside, it just stays in that checking account. But it's just a minimum based on unit count. And it just goes up a little bit more with each subsequent property. But this is just my personal opinion, I don't think it needs to be linear. So let's say you started with three K, right? It's not like you need three k for every unit. So when you're at 20 units, you don't necessarily need to say I need 60 k in that account. The reason being is is like I think ownership is lumpy, you'll have expenses on property one year and then expense on another property another year, it's not like five roofs could happen. But it's unlikely that five roofs are gonna go out same time. So just allows you to have an expense kind of build up the reserve again, and then another expense comes in like that.   Michael: It makes total sense. And I think about it the same way, like what's the statistical likelihood of having those five roofs go out on the same year across all five year properties is pretty low. So yeah, I think like you mentioned lumpy is a great adjective to use. And so you have expenses pop up on one property. And so the other properties can support the payment for that. And so they all just look to to keep each other afloat, so to speak. And the more properties you have, I find that the smaller dollar amount per property needs to be kept in reserve.   So if your number was 3000 per property, maybe if you have one property, you keep 3000. If you have two properties, you keep 5500. So your next property might be an additional 2500. So like you said the sum total is going up with each subsequent property, but the dollar amount per unit is actually decreasing. That's how I think about it.   Emil: I think we we covered most of Alvin's questions. So   Michael: I got a quick question for you both and I think I know the answer. So I think I asked you all you both probably about a year ago. Do you guys track your depression? And mortgage pay down on any kind of calculator sheet   Emil: In my spreadsheet where I have all my properties, and I'm looking at all the numbers on a yearly basis, I calculate all my cash flow. And on that yearly anniversary or whatever, I'll go look at the estimated property value and update on my sheet. And I'll go in and look at my outstanding loan. So it will like, you know, calculate how much equity am I sitting on in my portfolio? So I'll do that once a year.   Michael: But you don't have to, like the depreciation for most of us is going to be a straight line depreciation same amount every single year. Do you have that calculated or written down anywhere to see, okay, am I gonna be paying taxes on this income on this cash flow income? Or am I totally covering it?   Emil: I do not let my account handle that.   Tom: Trying to try to make us feel bad Michael trying to put us on the spot.   Michael: No, I was just I just curious.   I try to figure out how big of a nerd I am. No, no,   Tom: You're up there. Man. I love it. I am as well. But I have not done that exercise. I mean, I'll take a look at end of the year when the CPA fills it out. But I like the exercise. I like the exercise a lot. I personally don't do it, I take advantage of it and have a CPA who has that type of expertise to do that. But I haven't How do you do it Mike, why don't you work us back?     Michael:   Michael: Sure, yeah, I'd be I'd be happy to use it's a fun exercise. For those of us that are numbers driven, which I think many of us real estate investors are. So basically you can only depreciate the land portion of the purchase. And so that typically works out to about 80% of the purchase price. But if you look at your property tax bill, it'll say land value and then building value. And so you can only depreciate the building value of that. And so you take that value, residents property depreciated over 27 and a half years, you just take that value divided by 27 and a half, and that's your annual depreciation amount. So we'll make the numbers fairly easy on $100,000 property, if I assume 80% is in building value, that means I take 80,000 and divide that by 27 and a half years and I can depreciate $2,909 every single year on a straight line depreciation and so if your cash flow is less than 2900 bucks, you likely are going to have a negative or paper loss for that given year with the depreciation covering your all your cash flow.   So I think you have to remember, though, about that is that your your principal portion of the mortgage payment is not a deduction, I think only the interest is and so you have to get add the principal portion back in and then look at the total. But at the beginning of a loan, the principal payment contribution is so small, especially on like $100,000, or an $80,000. mortgage, you know, it's probably going to be 100 bucks or so you can look at an amortization schedule to see what it is.   But add that back into the equation and then take out your depreciation and see if you are still negative in terms of cash flow. And if you are, you know, it's highly likely that you're not gonna be paying taxes on those dollars in your pocket, which is a pretty amazing phenomenon.   Tom: Love it. And then any, you know, costs that come up. So yeah, that's your depreciation schedule, but any deductions you have so some RaM, your property management costs isn't up to you pay for some nice education through Roofstock Academy. This is not tax advice, please talk to your tax advisor. But that is, from what I've heard is doable.   Michael: Absolutely. Emil. you like that rant?   Emil: Yeah,   Tom: I love a good rant, I love it.   Michael: The other thing to keep in mind too, is chatting with your tax professional and strategizing a little bit if you have major repairs to make at the end of the year, you know, that year or at the beginning of next year, because that could have an impact on your taxes. And so I think to be more strategic and proactive can be really beneficial. And so talking about these types of questions and strategies with tax professionals is a super good use of of time and money.   Tom: Yeah, that's a that's a great way to you know, interview tax professionals that you're potentially using them as needle them on some of these different questions. I was just speaking with my tax professional about building a small office like unit and I was interesting learning about it like to be able to use that as a deduction of the costs of building that and again, this is please check for yourself, this is not tax advice, yada, yada, yada, all that preamble, you can only use that space for that particular activity that you are, you know, assigning it for and as soon as you do something else in it, it's violated, right? It's totally not the right way to word it. But there's a couple of very specific rules on building little little offices of being able to deduct that   Michael: Don't let anybody catch you playing fool in that space.   Tom: That's right or whatever working out. Yeah, that's right. Cool. We have two little rants out of that two little baby rants out your answer. Mine a little bit less in depth and technical. Yeah,   Emil: What would an episode of the remote real estate investor be without a couple rants? Guys?   Michael: That's a really great question. Boring.   Emil: Very, very boring. Not entertaining at all. Alright guys, let's end it here. Thanks, everybody for tuning in. Hope you guys got some value out of this one. And like Alvin did, hit us up on Twitter. I'm at Emil Shour. Michael, your at AlbaumMichael and Tom. You're at   Tom: TSchneido. I think I came up with that when I was like 16.   Michael: Like how you give out your email like skater do 27 Yeah, I made that when I was 16 like there's embarrassing. Yeah.   Tom: I just think it's the better things to say but funny names but yeah, nope, not gonna say them out loud. Keep em on the inside.     The old AIM names that are just so ridiculous thinking back to like those and the names my friends had it was ridiculous.   Alright, so that's our episode. Hope you guys enjoyed. Hit us up on Twitter if you have a question we'd love to tackle on a future episode. And we'll catch you guys in the next one happy investing   Tom: Happy investing.   Michael: Happy investing.