First things first: we want to make it clear that even though this post is going to be covering property management accounting basics, we are NOT accounting.
If you have any questions on property management accounting or how it relates to your investments, get in touch with a CPA in your area.
Now that we got that out of the way—property management accounting is important stuff. As an investor, you need to understand property management accounting basics in order to make informed decisions, to make sure nothing slips through the financial cracks (like tax deductions), and—most importantly—to stay on the right side of the IRS.
But as a landlord, what do you need to know to make sure your property management accounting is on point and accurate?
Hire a Professional
Unless you moonlight as a CPA, you should 100% hire a professional accounting to manage the accounting for your investment properties.
Do accountants cost money? Yes. But they more than make up for it. Accountants understand tax law and can often find tax deductions you had no idea even existed—and will save you a ton of money in the process. Their knowledge of tax laws will also ensure that you’re not breaking any—which can also save you big time (in time, energy, and cash) down the line.
Accountants can also advise you on how to make the best decisions for your particular financial situation. So, for example, rental income can qualify as either earned income or passive income. On your own, you might classify your rental income in a way that isn’t in your best financial interest—but when you work with an accountant, they can advise you on how to get the most out of your taxes (true story—my accountant was able to save me 15% on my taxes by reclassifying my income from earned to passive!).
Property Management Accounting Basics
Ok, so now that you know hiring a professional is key, let’s talk about some of the property management accounting basics.
Don’t Mix Personal and Business Funds
As an investor and landlord, it’s imperative to keep your business and your personal finances separate. Mixing two different sources of income (so, for example, business and personal) is called commingling—and it can lead to serious problems come tax time.
If you commingle your finances—and don’t keep impeccable records—it can be hard to determine which income and expenses are personal and which income and expenses are business related. This lack of boundaries between personal and business finances can be a huge red flag to the IRS—and can end up costing you a lot of time, money, and energy in fees, audits, and other negative tax consequences.
Have separate accounts for your personal finances and your business finances—and keep them 100% separate at all times.
Give your tenants plenty of different payment options
Accounting has come a long way; you don’t need to deposit all your rental payments in cash to your business checking account anymore.
Giving your tenants plenty of options to pay their rent—like through online rental portals—not only makes things easier for your tenant, but it can make things easier for you, too.
So, for example, we have an online payment portal for many of our tenants—but if they’re late on their rent, the portal won’t accept their payment. Back in the day, the tenant would have to come to our office to hand deliver a check or money order. But now, a number of retailers (like CVS) can send cash payments to us electronically. It’s a win-win; the tenant doesn’t have to drive to pay us in person and we don’t have to physically take cash or a money order to the bank in order to make a deposit.
The point is, the more options your tenants have to pay you, the more likely you’re going to get paid—so keep your tenant accounting options as flexible as you can.
Accounting has come a long way; you don’t need to deposit all your rental payments in cash to your business checking account anymore.
Keep Meticulous Records
If there’s one thing you take from this property management accounting basics review, let it be this: you must, must, MUST keep meticulous records.
Not only is it required by law to stay on top of your record-keeping, but having impeccable records is the only way to track your investment properties and stay on top of how each is performing.
When it comes to your investments, you need to be keeping track of every dollar you’re paid, every dollar that’s spent, and where all that money is coming from. So, for example, how much rent did you collect? When was it collected (and from who)? What expenses were paid from that rent? How about repairs or disbursements? You should also track of any additional income you, as the owner, need to contribute to each rental property.
Related Post: How Much Will Rental Property Repairs Really Cost You?
The best way to keep track of all of these financial records? Setting up trust accounts. The requirements for trust accounts vary state by state, but best practice is to have two trust accounts: one for rent collection and one for bill payment. This allows you to keep all your funds separate (and avoid any commingling issues), pay everything from the appropriate count, and—most importantly—create a clear trail of where your money’s going for tax time. (Side note: as a property manager, your bank may also send you random requests for verification on your trust accounts—making it even more important to make sure your records are on point.)
So, for example, let’s say you just had one trust account for all of your properties—and you were both collecting rent and paying out expenses for all of said properties out of that one account. Imagine what a nightmare that would be! You could easily misappropriate funds (so, for example, by using security deposit money for repairs)—and that could come back to haunt you when you file your taxes.
When it comes to your investments, you need to be keeping track of every dollar you’re paid, every dollar that’s spent, and where all that money is coming from.
The point is—get separate trust funds. Use them appropriately. And keep impeccable records. You’ll thank yourself when tax time rolls around.
Be Crystal Clear in Your Contract
The last property management accounting basic you need to keep in mind as a landlord? Making sure your contract is crystal clear on how funds can be applied.
In our contract, it clearly states that we can use rental funds for any non-rent obligations—and we did that on purpose. So, for example, if there was a garbage disposal that needed to be repaired and it was determined that it was the tenant’s responsibility, we make it clear in our contract that we can use their rental payment to cover that expense.
But if the contract wasn’t clear, the tenant could say that their rent is strictly to be used to cover their rental expenses—and any additional expenses would have to be paid out separately. That can cause a whole host of issues as a landlord; the tenant may never send the separate payment, which means you’d have to wait until they moved out to take it from their security deposit.
By making things crystal clear in the contract (“we will deduct any additional expenses from your rental check”), you ensure you get the money you need when you need it—and aren’t stuck waiting to deduct unexpected expenses from tenants’ security deposits.
Wrapping Things Up
Property management accounting can seem pretty overwhelming. But with the property management accounting basics, you can work with your accountant to make sure your finances are on the up-and-up—and you aren’t too stressed out come tax time.
