The Right Bank Account for Mom-and-Pop Landlords

Adam Rust

Landlords have a particular set of needs when it comes to managing their money. In this post, I’m going to discuss the issue in depth. I am a landlord myself, so these comments come from my own experience. I have seen what works - and also what does not.

I recommend that all “mom-and-pop” landlords get a separate bank account for each property. First of all, it makes your life a lot simpler.

First and foremost - having a dedicated account for each unit will simplify the process of tracking your expenses. If you have a debit card dedicated to each house, you will capture everything. Everything - even when you buy gas for your lawnmower. It's not satisfactory to just say that you can attribute all of your Home Depot expenses to your rental house (s). What if you also visit Home Depot for your personal household? Now that you are handy, I bet you do a lot more fixing-up around home, too. It's great at the end of the year to be able to export everything to a single spreadsheet.

It helps with returns, too: I don't like to get cash when I return something, because it distorts my real expenses. I ask them to put the funds back to my account.

It also helps with depreciable expenses: Did you replace the HVAC unit in 2010? Did you put in a new concrete walkway back in 2008? Did you replace the roof in 2014? You need to know how much you spent and when you did it. You may end up selling your property before you have depreciated the entire expense. You may have had years when your total income was such that you couldn’t expense that year’s depreciable portion of prior investments. All of this becomes very important when you try to sell the property. You will have the evidence to get the maximum cost basis for your property, and as a result, you will reduce the long-term capital gain you report to the IRS.

Features a landlord needs in a bank account:

It lets you deposit money orders to the account. Some tenants may pay you with a check. Many will pay you with a money order. I do not take paper checks until I have built up a lot of trust with my tenant. I prefer money orders to checks or cash. Some banks will let you deposit a money order with your phone, others will let you use an ATM, and others will insist that you bring the money order into the branch. I used to have a bank that only accepted money orders in person. That meant I had to take time off from my regular job.

It accepts Venmo, Zelle, or Cash app: Collecting rent by a money transfer app has become the new normal. Young people – a significant portion of the renting population – like to use these services. You will feel the same way. I remember a time when I had a difficult time collecting rent from a tenant. She attempted to tell me she had already paid the rent, but since I had asked her to use Venmo, I could easily verify that she had not done so. “Maybe Venmo is broken,” she said. With one of these services, you no longer have to take a tenant’s word that the “check is in the mail." Moreover, you can collect rent 24-7 from anywhere. You can thank a tenant for paying rent on Venmo. On the Cash app, you can create a receipt and text it back. I prefer to use these services to pay freelance construction crews as well. Ideally, your account has Zelle and at least one of the other main options.

It has online bill pay. Online bill pay is free and convenient. It beats paying by check hands-down. You will use bill pay to pay municipal water bills, credit card issuers, and local small businesses.

It has an interest-bearing savings account associated with the account. Landlords hold deposits for tenants. Why leave that money in a checking account that doesn’t pay interest. You should find a way to earn interest on those assets. Right now, you can get more than two percent on your deposits with a variety of digital banks. True, you could move money to your personal savings account, but that creates a problem with your expense reports at tax time.

• You can set up recurring electronic debits, and outbound ACH pulls. Some prepaid debit cards do not let billers remove funds from an account by ACH. You will want to be able to pay your mortgage automatically. One secret not known to many people is that it is faster to pay a bill through the vendor rather than via bill pay. If you log on to your mortgage lender’s website and input your routing and account numbers, your account will be credited within 24 hours.

• It has the means to deposit checks with your phone. Mom-and-pop landlords have enough to do already! Why make life more difficult with trips to the local bank branch?

• It lets you make a bank-to-bank transfer without a lot of hassle. You may want to move funds from your landlord account to your personal account. After all, you are in this to support yourself.

You do not want an account that comes:

with a minimum balance fee - sometimes you are going to be stretched thin. When I have repairs to make, I need to have access to all of my money. True, you can charge what you need to buy from Home Depot with your credit card. Nonetheless, you have to pay your mortgage with cash. It's the same if you want to pay a contractor. Very few if any will accept a credit card. Thus, if your bank has a minimum balance fee, you are at a disadvantage. I had an account that charged $15 per month if I didn't have a direct deposit or a minimum balance (daily average) of $1,500. It was from a reputable bank, but regardless, it wasn't suitable for my needs.

with a returned check fee - tenants have a way of bouncing checks. Of course, you shouldn't be accepting checks in the first place.

without a mobile payment app - and not just with PayPal. PayPal will charge you 3 percent to receive funds. If your tenant pays $1,000 per month, then you have just subtracted $360 from your cash flows. Tenants like to pay with CashApp or Venmo, in my experience. Also, you never have to hear that "the check is in the mail." For the last few years, CashApp has had a function inside the app that allows you to send a receipt by email or text. Tenants appreciate that service.

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Filtering it down to the right choice

By now, you should have concluded that I do not place much value in having access to a bank branch. In my experience, a savvy landlord shouldn’t have to visit a bank branch. Instead, he or she should strive to do everything digitally. The more you can do to respect your time, the longer you will remain in the business of managing properties.

Moreover, you don’t need a branch because most of the things you will have to do are very simple. You need to move money. The goal should be to do so with as little friction as possible.

The key to an excellent landlord banking experience is the user experience of your banking app. You can still use a local bank, but you should be comparing bank accounts according to the experience you have when banking with your smartphone.

Most – but not all - of the nation’s bigger traditional branch-centric banks also have useful apps. Most offer Zelle, Venmo, and Cash app.  The newer “neobanks” (Chime, Varo, Axos, Ally) tend to provide the money transfer apps, but its less often the case that they have Zelle. Zelle is still primarily the domain of the twenty or so most significant banks in the country.

Most of the large banks and some of the tech-centric digital banks will not accept money orders by remote deposit. I have been able to do this with my Simple account, but now that Simple is abandoning bill pay I will need to look for another account.

The large banks fall down on the interest they pay you on your savings. Very few pay interest on savings. That means you probably need to research digital-only options. Nowadays, digital banks pay more than two percent interest on savings without charging any fees.

For these reasons, I’m skeptical of how much utility a mom-and-pop landlord can derive from the checking accounts at most of the larger banks. As I said, you need to become adept at banking with your phone. If you have a day job, you only have so much time, and as a result, you must find an account that saves you time. After all, we're talking about a side-hustle; i.e. something you do "on the side."

For those reasons, my overall recommendation is that you find a digital bank account that pays interest on savings, offers remote deposit of not just checks but also money orders, and gives you access to online bill pay.

I recently compared the best high-yield savings accounts on my blog. Some of these are exclusively savings accounts only, but others provide an in-app linkage between savings and checking. One of these may be the best choice for your property management.

I hope I have helped you with what is one of the most mundane aspects of managing rental properties. If you follow this tip, you will save a lot of time at tax time.

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Adam Rust owns three rental houses in Durham, North Carolina. He bought his properties in 2009, 2010, and 2012. He does his best to be a good landlord to his tenants by providing quality homes at reasonable prices. He also pays attention to the bottom line: properties must cash flow in the end!