For landlords, property management bookkeeping is one of those ugly little jobs that must be completed day in and day out. As rent payments come in, expenses go out, and stacks of receipts pile up, it’s easy for landlords to lose sight of their financial pictures.
Imagine facing tax season with disorganized records, struggling to understand your true profitability, or missing out on potential tax deductions because of a misplaced receipt. Solid bookkeeping can help you eliminate these concerns.
That’s why we compiled a list of the five most essential property management bookkeeping tips to help you stay organized throughout the year. If you put in the work upfront, recording your finances and preparing for tax time gets much easier in the long term.
A landlord’s most important task is to build a solid financial foundation. The first step? Establish a system that allows you to track income and expenses accurately. Here are some tips on accomplishing the mission.
Open separate accounts for your rental business. And we’re not just talking about opening a single business account that keeps your personal finances separate.
Consider opening an account for daily transactions, a security deposit account to hold tenant funds (which may be required by your state to be interest-bearing), and additional accounts to fund major repairs or capital improvements.
A chart of accounts is the backbone of your bookkeeping system. It categorizes all your income and expenses so you can sort them out easily. Create separate income accounts for rent, late fees, application fees, and pet fees (if applicable).
In terms of expenses, these can include property taxes, maintenance and repairs, management fees, insurance, and utilities (if you, the landlord, pay them). Keep in mind that you can customize your chart of accounts to accommodate whatever needs you have.
Choose between cash and accrual accounting methods to properly document your income and expenses on your tax returns. Let’s briefly discuss each system to find what’s best for your property management bookkeeping system.
The cash accounting system is more straightforward and easy to understand of the two systems. With the cash accounting system, you record income when it’s received and expenses when they’re paid.
For example, when you receive a rent payment, you’ll record it. If your tenant misses a payment, you won’t. As a result, the cash accounting system provides real-time cash flow visibility and a clear picture of your immediate financial situation.
On the downside, cash accounting doesn’t provide the most accurate profitability picture. Your records won’t reflect income earned if it’s not yet received, nor will you see expenses incurred but not yet paid, which makes it harder to get a view of your actual financial standing at a glance.
Accrual accounting is a bit more challenging to understand than cash accounting. This method records income as it’s earned and expenses as they’re incurred. For example, even if a renter misses a payment, you’ll still record it.
On the other hand, if you hire a repair worker and agree to pay them next month, you’ll still record the expense as if you exchanged cash that day. The benefit is that you’ll gain insight into where your accounts are headed rather than where they stand now.
In terms of drawbacks, accrual accounting is more complex to implement. Landlords using this system must track outstanding invoices and accrue expenses. But, if you have a large number of properties, the system can help you get a better overall view of your overall financial health at a moment’s glance.
Of course, the preceding were just a few pros and cons of both systems; diving deeper into each is important to see which will work best for you. If you have a very small portfolio, cash accounting makes sense because it’s simple. But, as your number of portfolios scales, you may want to consider the accrual method.
Software like REI Hub helps landlords keep track of all their income and expenses without manual data entry. REI Hub enables you to link your bank account to import expenses and income quickly and securely for increased accuracy.
Plus, with secure document storage, you can snap photos of receipts and keep them in a single, digital location rather than searching for them in drawers or shoeboxes. For more information, check out our breakdown of the best property management accounting software.
Now that you’ve got an idea of how to lay your bookkeeping foundation, the work shifts to ensure a solid and reliable flow of transactions. The best way to start streamlining your processes is to use property management software with the following features.
With online rent collection, landlords can easily collect rent without the hassle of meeting tenants in person and depositing cash, checks, or money orders at the bank. Plus, with the right software, all your income gets automatically recorded for easy bookkeeping.
Additionally, software providers like TurboTenant enable landlords to send late payment reminders and automatically apply late fees.
You could manually record your rental property expenses via a spreadsheet, but as you scale your properties, the number of transactions increases markedly. Instead, use bookkeeping software from TurboTenant to effortlessly record each transaction, store digital receipts, and effortlessly send those transactions to REI Hub for streamlined tracking. It’s property management bookkeeping simplified.
As alluded to in the expense tracking section, you can use software to automate some of your more repetitive tasks.
Software like REI Hub enables landlords to record monthly transactions automatically with their Rules system. Systems like this match transactions based on their amounts and descriptions and apply them to specific properties, revenue, or expense accounts.
Bank reconciliation is comparing your bank statements to your bookkeeping records. It’s a critical step toward ensuring the accuracy of your financial data because it helps landlords identify discrepancies.
You can choose to reconcile your accounts at any frequency that makes sense to you, but many landlords perform the task every month. You could reconcile accounts by manually comparing bank statements with transactions made in a spreadsheet or in bookkeeping software. Alternatively, software like REI Hub can automate the process to ensure smooth sailing.
Regularly running reports provides landlords with valuable insights into their business performance. Aside from performance considerations, running reports gives landlords financial clarity to help make informed decisions, prepare taxes, and track investments.
Landlords should consider generating the following reports consistently, and many different accounting software brands offer these types of reports.
Profit and loss statements, or P&L statements, summarize your income and expenses over specified periods. They’re essential to calculate net profit and identify areas where you can optimize rental income.
If you’re looking for a snapshot of your financial position at a specific point in time, create a balance sheet. In a single report, balance sheets show assets, liabilities, and the owner’s equity.
If you have more than a couple of properties, utilizing rent roll reports can help you understand how much rent you’ve collected on a per-property basis. They’re essential reports that help landlords get a quick at-a-glance look at who has and hasn’t paid rent.
Schedule E forms are less directly relevant to understanding a property’s financial health on a day-to-day basis, unlike P&L statements, balance sheets, and rent rolls.
Instead, think of it as a yearly report card specifically for tax purposes. Landlords use Schedule E forms to report all their rental income and expenses (including depreciation) for the entire tax year to the IRS. This helps them determine their taxable income from the rental property and claim any eligible deductions to minimize their tax burden. It’s a crucial step in ensuring accurate tax filing for rental properties.
For landlords, maintaining a well-organized bookkeeping system is critical for your long-term success. Tax time will be difficult if you can’t properly account for all the income and expenses of running a property management business.
Plus, staying organized will help you understand precisely where you stand financially. Not only is it good business sense, but it’s critical if you want to create passive income and stay in business.
TurboTenant’s software enables landlords to collect rent online and record expenses from the mobile app. Then, income and expenses can automatically be filtered into REI Hub for streamlined financial tracking — consider it property management bookkeeping on easy mode.
Sign up for a free TurboTenant account today and add bookkeeper to your list of titles.
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