Create a bank account for each individual rental property, along with a debit card or credit card. This makes it easier to track transactions by property and avoids the risk of commingling your personal expenses with your business expenses.
Having a good accounting system in place reduces the risk that you’ll forget to report income, or over-report expenses, two mistakes that can get you in trouble with the IRS. Many real estate investors use a free online system like Stessa to automate income and expense tracking and generate personalized financial reports.
Cash vs Accrual Method
The cash method of accounting reports income at the time it is received and bills at the time they are paid. For example, if you deposit $2,000 in rent on June 1st and pay $1,500 in bills in the month of June, using cash accounting you have a profit of $500 for the month of June.
Accrual accounting reports income when the receivable invoice is generated (even if payment hasn’t been received) and expenses when the cost is incurred (but not yet paid for).
For example, if you bill the tenant for $2,000 in rent in June but the tenant doesn’t pay, you still have income and a receivable of $2,000 based on the accrual method. If you receive $1,500 in bills for the month but don’t actually pay them until July, you still have an expense and payable amount of $1,500.
In both of these examples you have a reported net income of $500, but your actual cash flow for the month is different.