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March 14, 2023

Rental Property Bookkeeping and Accounting: Landlord’s Guide

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Renting out realty is a reliable source of stable revenue. Suppose you are leasing your property to an honest and responsible person. In such a case, it is a great chance to get rid of your mortgage, expand your real estate portfolio and passively save money. But sometimes your revenue is less than you think. The cost of advertising your offers, maintaining the real estate, making unscheduled repairs, and finding new tenants urgently can be a costly and overwhelming objective. To minimize risks and increase the profitability of apartments or office space, we recommend implementing rental property bookkeeping.

Profits of property accounting

Small landlords often see the need for financial accounting as a waste of time because their processes are predictable. They receive the agreed amount every month, which is indicated in the papers. Let’s discuss why it is critical to control cash flow and keep records:

  • Availability of actual and detailed data: the complete information analysis will allow better capital control and speed up the audit procedure.
  • Compliance with the legislation: refusal to conduct rental property bookkeeping violates legal requirements, and, most likely, will lead to troubles if you plan to act within the legal field.
  • Careful expense processes: you may be spending small amounts of cash to solve a problem, e.g., purchasing a new refrigerator or minor repairs. You may think these spendings are insignificant and not even make a note of them; however, these points add up and can cut your tax charge.
  • Preparing financial statements: these documents are vital to predict and plan effective real estate investing or to prepare for high costs.

There are other reasons why it is necessary to take care of bookkeeping, especially if you are planning to buy a house or expand the storage space in the future. Financial institutions want to see your business’s success before they approve a mortgage credit.

The key rules of accounting in the property field

Let’s begin with the big picture of how leasehold bookkeeping performs. Monitoring your earning and costs will be simpler when you understand the fundamental principles.

  • Banking aspect: while it is tempting to many people to have all rental capital on a personal bank card, opening an individual account for each realty is necessary. If you avoid mixing, you must spend less time and effort on reconciliation, income statements, and tax charges.
  • Choice of cash or accrual technique: another critical moment in customizing an accounting system is deciding what accounting algorithm to utilize. If recording the inflow and outflow of capital on the day of the operations is more convenient, select the accrual technique regardless of when the funds enter or leave the account. You may prefer cash if you record transactions as account balances change.
  • Tax forms: it is essential to study all tax documents related to stealth rentals to comprehend the requested insights. In most situations, the IRS requires entrepreneurs to fill out Schedule E to inform experts about income and expenses for various properties. The authorized body also requires realty owners to show rental earning if it is more than $600 additionally.

Consulting with a bookkeeper who is well-versed in your field’s finances is the only variant to protect your savings. The specialist will tell you how to effectively introduce accounting systems and assist you in researching your economic results.

Rental Property Bookkeeping and Accounting: Landlord’s Guide

No More Bookkeeping Stress

Keeping proper financial records is time-intensive and small mistakes can be costly. BooksTime makes sure your numbers are 100% accurate so you can focus on growing your business.

What revenue and costs arising from the rental?

It is critical to evaluate the revenue and spending during your activities correctly. The earning from the real estate you rent out is straightforward; it includes all the money you get from the tenants. Most often, earning includes such items:

  • Monthly rental payments: this capital should be recorded as income at settlement or when funds are credited to the account.
  • Security deposit: these funds are also considered earnings if you plan to employ them as payment for the first or last month of the tenants’ stay. The same is true when we speak about the deposit for a pet if any. Refrain from including a pledge that will have to be returned.
  • Cancellation commission: the funds you get are also considered rental earnings if you require an early termination fee.

These activities also incur a large number of costs, including:

  • repair and maintenance,
  • paying taxes,
  • settlements with suppliers,
  • placement of advertisements,
  • insurance payments,
  • public utilities,
  • deposit interest, etc.

Controlling rental costs is vital because it helps to ensure leasing realty is a profitable business. In addition, part of the costs can be deducted from taxable profit, so it is critical to saving transparent records to demonstrate to the IRS.

A few words about the schedule E

Schedule E is a tax table that must be filled when you get various kinds of revenue, called passive income. Companies do not submit papers to competent authorities; the owner files this form as part of their tax return. Schedule E is actually when we speak about certain groups of small businesses, including property owners, S-corporations, and more.

Such a tax table shows the profit or loss from the rental of real-estate. If your reasonable costs do not correspond to the points on the paperwork, you must select the optimal cost type offered by the IRS.

If you employ the services of a specialized site to promote and lease your realty, you may classify these costs as advertising costs; you can get more information from a qualified accountant. You must responsibly fill Schedule E of your tax return annually.

Tips on how to simplify property accounting

Correctly customizing a realty structure will positively impact your commerce. However, starting everything from scratch can be difficult, so creating a precise algorithm of actions is important. We have put together a few simple recommendations to build a reliable system:

  • Be organized: if you are just planning to start accounting, you should clearly organize financial activities at the initial stage, which means finding all your papers for the last periods. You will likely have to review your bank card and account statements to monitor the inflow and outflow of resources for each object.
  • Select modern technologies and platforms: rental property accounting could quickly become a nightmare earlier because you had to interact with a ton of paperwork. Today, it is faster and more convenient to employ virtual platforms to save and track every receipt and invoice. If you cooperate with a reliable management company, it will most likely have access to modern technologies, so you will not have to pay extra to adopt the programs.
  • Control costs: while making a business account for each object is an optimal decision, you won’t get any value from such a structure if you don’t constantly monitor what sums are coming in and going out. Either set yourself a reminder to continually log in and watch your procedures or sync your current accounts with rental property bookkeeping platforms that collect personal insights and form a detailed view of each reality and the profitability of the entire realty portfolio.
  • Make account reconciliation and control reporting: reconciliation compares the data specified on a bank statement with the economic reports of the leased property. All parameters must coincide; if not, determine where the fault happened and fix it as quickly as possible. If you reconcile accounts every month, this will significantly alleviate the preparation of annual statements.

Accounting is a serious work that can take a lot of time from a landlord. Since realty owners often have to deal with many other tasks, it is vital to use all available tools and recommendations and consider delegating some of their financial authority to an outsourcing company. Saving time allows landlords to be more actively engaged in business development and ensure maximum satisfaction of counterparties.

Rental Property Bookkeeping and Accounting: Landlord’s Guide

Rental property programs

Today, there are a large number of online platforms on the market that let you improve your accounting. Some digital products are designed mainly for real estate owners; other applications have more comprehensive functionality. Most often, property owners choose the following solutions:

  • Stessa is a user-friendly bookkeeping and reporting platform that lets you link your real estate data and get complete real-time research on your portfolio’s productivity. In just a few minutes, you’ll have insights to assist you in making more innovative decisions.
  • TurboTenant is a feature-packed property management software created in collaboration with REI Hub. Adding TurboTenant will make finding and verifying potential tenants easier, signing rental agreements, and collecting fees. All these features are available in a single place.
  • Rentec Direct is one more practical program offering optimal tax reporting functionality. You can quickly find the data you need during the tax days. It lets you obtain rental payments through ACH, credit cards, and electronic cash systems. All processes are automatically monitored and displayed on the platform.

The fundamental advantage of virtual realty solutions is that you can store all the data about possessions and counterparties in a single repository. It is beneficial for portfolio lessors. With just a few clicks, you can explore revenue and costs without worrying about missing important data or forgetting to record an operation.

Bottom line

With the advanced virtual bookkeeping platforms available nowadays, many who invest in apartments record all the transactions independently every month. Then a skilled tax consultant prepares and files the final tax return at the finish of the financial year.

Choose BooksTime to work with. Having a personal CPA or a bookkeeper who researches your economic situation and computes your tax base is costly but well worth it. Specialists comprehend how to employ various depreciation schemes and can guarantee you apply all the tax deductions to reduce costs.

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Author: Charles Lutwidge

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