Investment Property Bookkeeping, Part 1

28 Nov

Happy Thanksgiving weekend… this holiday we’re thankful for our first rent checks!

This post details how we’re organizing the income we collect from our investment property to properly anticipate future expenses.

I should start by stating for the record one of my personal rental property goals: everything we spend on the duplex after the initial purchase should come from income generated by the duplex.

Put another way, with careful planning and a little luck, we won’t have to apply another cent of our work income towards the duplex. Future mortgage pre-payment would be an acceptable exception – but I’ll ignore that issue for today’s purposes.

First, I needed a new checking and savings account exclusively for rental property income/expenses. There are several good reasons to separate personal and investment funds:

  1. It’s easier to report your expenses and deductions at tax time.
  2. In the event of an audit, they want to see that you’re treating this property as a business.
  3. If I slacked a bit on our record keeping, we can still easily eyeball whether we’re making money or not.

I opened an ING DIRECT checking and savings accounts for our rental funds. I was already a customer of ING DIRECT, and I really like the savings sub-accounts where you can name each pool of money differently. The most annoying part about using ING DIRECT is that I have to mail my rent checks to deposit them, but hopefully that will be a short-term problem.

So now I have 1 checking account and 4 savings sub-accounts: Variable Expenses, Security Deposit A, Security Depsoit B, and Income Taxes. Some details about each of these accounts:

  • Checking Account – where all rent is initally deposited, and always holds the budgeted funds for PITI ($1,104), repairs ($87.50), and excess cash flow ($200). Cash flow we can apply to anything we want, like mortgage pre-payment, upgrades, miscellaneous expenses like office supplies, or saving for the next duplex. In the short term I’m going to use excess the cash flow to beef up our repair fund just in case something large breaks soon.
  • Variable Expenses – this savings account includes the budgeted funds for things that are irregularly paid, including: future vancancies ($87.50), HOA dues ($50), and professional fees ($25). This savings account is automatically funded $162.50 from our checking account each month. Because I’m a nerd, I then use Quicken to further allocate the money to each sub-category.
  • Income Taxes – I need to dig deeper into this, but my git-r-done way of estimating our tax burden was to start with total rent minus deductions for HOA dues, insurance, property taxes, and 75% of the principal/interest payment (only the interest is deductable). Then I take 25% of that number to get an estimated amount to save for each month, which comes out to $192.47. Rounded up, this savings account is automatically funded $195 from our checking account.
  • Security Deposit A & B – these were transferred to us at closing, and we named each one in ING as Security Deposit + the name of the address the security deposit applies to. I’m leaving those alone until a tenant moves out.

The amount allocated to each fund is directly related to the balance sheet I created previously, with roughtly half of the positive cash flow money being allocated to income taxes.

Update: be sure to check out part 2 and part 3 of my investment property bookkeeping series.

“Landlording is probably the world’s second oldest profession and certainly the most lucrative.” -How to Buy & Manage Rental Properties, 1986

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4 Responses to “Investment Property Bookkeeping, Part 1”

  1. beth December 20, 2011 at 1:32 am #

    You might enjoy the blog at and info under the “invest” tab. I look forward to reading more about your landlord adventure.


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